GBP/USD – Steady as UK Posts Mixed Employment Data

The British pound has stabilized after Tuesday’s sharp losses, trading in the low-1.59 range on Wednesday. On the release front, the Average Earnings Index improved to 0.7%. Employment numbers were a mix, as Claimant Count Change missed expectations, while the unemployment rate surprised with a drop to 6.0%. In the US, we’ll get a look at US releases after a quiet start to the week. There are three key events on the calendar – Retail Sales, Core Retail Sales and PPI.

In the UK, the Average Earnings Index edged up to 0.7%, matching the estimate. This was a four-month high for the indicator, which is an important indicator of consumer inflation. On the employment front, Claimant Count Change continues to drop, but the reading of -18.6 thousand was well of the forecast of -34.2 thousand. Meanwhile, the unemployment rate dropped from 6.2% to 6.0%, its lowest level since November 2008. Strong employment numbers is a sign of a healthy economy and could give a boost to the wobbly British pound.

British CPI, the primary gauge of consumer inflation, continues to lose ground. The index dropped to 1.2%, a five-year low and short of the estimate of 1.4%. Core CPI and PPI Input also missed their estimates, as inflation indicators continue to point downwards. The weak CPI reading gives Governor Mark Carney more breathing room to maintain current interest rate levels, and investors responded to the news by dumping their pound holdings on Tuesday. There is growing sentiment that the BoE could delay a rate hike until the second half of 2014, with inflationary pressures continuing to recede.

The US dollar has run roughshod over the pound, gaining almost 7 cents in the past six weeks. The dollar rally was halted briefly thanks to last week’s FOMC minutes, which were unexpectedly dovish. In the minutes, the Fed poured some cold water on rising expectations of a rate hike, as a number of policymakers said that the Federal Reserve should take a more data-dependent approach regarding a rate hike. The Fed also voiced concern about the rising strength of the US dollar which could weigh on the recovery. On the weekend, FOMC member Stanley Fischer said that the Fed could slow tightening if global growth is weaker than expected. Strong US numbers have raised expectations about a rate hike, but the Fed appears to be taking a cautious approach towards the timing of a rate hike. Still, with QE set to wind up by the end of the month, rising speculation about higher rates bodes well for the US dollar.

GBP/USD 1.5921 H: 1.5938 L: 1.5878