The UK's data plays into Mark Carney's hands

Mark Carney’s wishes may have come true. After the UK economy started to look too strong for forward guidance version one, it has cooled down a bit in recent months, which helps to justify forward guidance 2.0.

Yesterday we had cooing in inflation pressure, today it was the labour market’s chance to come off the boil. The unemployment rate actually rose in December to 7.2% from 7.1%. This may be down to a statistical quirk as the number of unemployed people in the UK fell by 125,000 from July to September 2013, while the economy created 193k jobs between July and September 2013, which was weaker than the 250k expected. On the plus side, the number of people claiming the dole fell by 27.6k in Jan, over the last 12 months the number of people claiming jobless benefits has fallen by more than 330k, which is good news for the UK Treasury as it tries to being down the cost of welfare payments.

There are still pockets of weakness in the labour market figures, pay growth in October –December 2013 relative to the year prior rose by 1.1%. Even after the decline in inflation this is still a negative rate of wage growth in real terms, although the situation has improved over the last 12 months as prices have started to come down.

Overall, the labour market data is fairly healthy, although the pace of job creation seems to be slowing. Wage data is also a concern, although the Bank of England’s fresh pledge to hike rates gradually should assuage consumer fears, at least in the near term.

The Bank of England minutes were also released this morning, the highlights include:

• All members appear to be agreed on Forward guidance 2.0, and that any increase in the bank rate in the coming months would only be “gradual”.

• The MPC agreed that none of the Bank’s knockout conditions had been triggered.

• Productivity was still an issue, which showed that robust growth had not been accomplished.

• Overall, the message was consistent with the BOE’s Inflation Report and suggests that the BOE will aim to keep rates low for the long-term.

The market reaction:

• GBPUSD fell on the back of the weaker than expected unemployment data, although it managed to stay above 1.6655 – Tuesday’s low. This suggests that the pullback will only be shallow. However, we still think that 1.6825 – the high from Monday –is a short term top for this pair, and the recent softening of UK economic data could reinforce the importance of this resistance level for the bulls.

• UK 10-year yields have fallen to their lowest level in over a week and the spread between the UK and the US also narrowed further, which could limit GBPUSD upside in the near term.

• The market has pushed out the prospect of the first UK rate rise to May 2015, on Tuesday the market was looking at an April 2015 hike, which also supports a mild softening in GBP.

Takeaway:

• Overall, the UK data has come off the boil but it remains relatively strong, especially compared to the US where the data is still impacted by the weather.

• This supports the BOE’s evolution of forward guidance that was first announced in last week’s Inflation Report.

• The data suggests that the prospect of a rate increase at the end of this year could be a little rich at this stage.

• Although the data is mildly GBP negative, we believe that GBPUSD downside could be limited due to the on-going weakness in the USD.