• UK Employment: So That’s All Good Then!
• Rose-Tinted Speculators
• Sterling On A Roll

Forex traders far and wide know that sterling has been one of the best performing majors so far this week. And yesterday proved yet again that the markets are eager to rally on the slightest whiff of something positive! 

For the UK and its currency, the good news came courtesy of the employment market statistics, which showed the jobless rate falling by nigh-on 6,000 in July. But many are already asking - with the Olympic Effect, whereby the country having just staged the greatest show on earth (albeit thanks to £9bn of spend, or overspend, at least seventy thousand volunteers and the last-minute drafting of the armed forces) - is the UK jobs data too good to be true? Or, as Forex.com’s head of research, Kathleen Brooks, posits: “You may be wondering why the UK economy is producing more jobs even though growth is contracting. That is a valid question and one that is not that easy to answer.”

Indeed, even Bank of England guvnor Sir Mervyn King has called the UK’s employment data “puzzling”. Perhaps Britain’s workers are producing less than they were prior to the recession in 2008. Or maybe the country’s hard-pressed manufacturers, for a great many months now stymied through depressed export markets stretching across Europe to the USA and the Ear East, are simply “skill hoarding” staff in the hope that orders will soon recover. Who knows. But as Brooks says, “…if employers are hoarding staff, then they may start to lay them off if the economy continues to perform as poorly as it has of late.” And on closer scrutiny, Brooks points out how the data demonstrates about half of the jobs being for part time workers… “so it’s not all rosy.”

One to Watch: Sterling

From a currency markets perspective, where does that leave sterling? The jobs data may have hijacked yesterday’s headlines, but the other crucial element to bear in mind is the voting pattern at the Bank of England. This was seen to be unanimous, with - as Brooks says - “all nine members <of the MPC> deciding to keep rates on hold and not to make any more asset purchases. This is the first time that no one voted to extend the BoE’s QE programme since January this year.”

But it doesn’t suggest to most of the experts I’ve consulted that there has been a decisive shift to the hawkish camp since July. Rather, Mervyn and his cohort remain in a wait-and-see mode, and - as Kathleen Brooks says, “…will act if the situation deteriorates further.” 

So, as currencies guru Marc Chandler affirms, this is the big week for UK economic releases. “The slew of data concludes today with the July retail sales data, which are expected to be soft (Bloomberg consensus -0.1percent on headline)”, he says.

Which is fine as far as it goes. However, the high frequency data does not change the overall picture of Britain’s economy. The BoE expressed concern that sterling's strength was curbing export growth and the re-balancing process. Since June 2009, when exports bottomed, they rose about 31 percent through last October, since when exports have fallen almost 8 percent. Despite pursuing QE, the BoE is frustrated with the strength of sterling. 

“On one hand,” says Chandler, “this dovetails well with our inductive argument that notwithstanding economic theory, QE has not been negative for the currencies of countries that pursue it. On the other hand, there is not much the UK appears prepared to do to resist the GBP’s strength; part of which, after all, reflects the euro's weakness.”

Drew Hillier. Editor, ForexSpace.com