Pound Finds Limited Support On Improving Labor Picture, Is Additional QE Ahead?

DailyFx · October 14, 2009, 6:50am

The British Pound has started to give back early gains derived from a better than expected employment report. Sterling was already finding support on broader optimism when September jobless claims crossed the wires at 20,800, beating expectations of 24,500

[B]Talking Points
• Japanese Yen: Found Support at 88.90
• Pound: Jobless Claims Lowest In 15 Months
• Euro: Industrial Production Gains For Fourth Month
• US Dollar: Advance Retail Sales, FOMC Minutes Ahead[/B]

[B]Pound Finds Limited Support On Improving Labor Picture, Is Additional QE Ahead?[/B]

The British Pound has started to give back early gains derived from a better than expected employment report. Sterling was already finding support on broader optimism when September jobless claims crossed the wires at 20,800, beating expectations of 24,500. It was the lowest number of Britain filing for unemployment benefits in 15 months which kept the claimant count rate at 5.0%. The improving labor market has positive implications for future domestic growth but consumers still face tight lending standards which could limit potential consumption.

Despite the improvement in the labor market Britons saw earnings growth slow to 1.9% which was the lowest in at least 13 years. The BoE will most likely maintain their current accommodative monetary policy as they maintain that downside risks remain for the U.K. economy. Inflation falling to its lowest level in five years will allow the central bank to continue its quantitative easing efforts if they chose to do so at next month’s policy meeting. The current asset purchase program will end at that time and Prime Minister Gordon Brown has already stated that stimulus efforts must be maintain to avoid a deeper recession. The GBPUSD ran into resistance today at the 20-Day SMA at 1.6042which could lead to a retrace back toward support at 1.5700

The Euro set a fresh yearly high today of 1.4914 as equity markets regained their footing and were higher by over 1.00% across the board. Optimism continue to build that the global economy has turned the corner and early earnings reports from multinational companies like Johnson & Johnson and Alcoa have reinforced that view. The single currency continues to be driven by risk sentiment and the current earnings season will continue to have influence over its direction. Meanwhile, EZ industrial production rose for a fourth straight month in August by 0.9% as demand for durable consumer goods rose 5.3%. Economists were expecting a rise of 0.2% but an upward revision of July’s reading to 0.2% from -0.3% compensated for the shortfall helping sustain bullish Euro sentiment.

The dollar continues to suffer at the hands of risk appetite as it fell to a new yearly low. The greenback continues to trade lower against high yielding currencies as Chinese exports dropped the least in 11 months. However, we may see optimism wane with today’s U.S. advance retail sales report forecasted to show demand fell by 2.1% in September. Consumer consumption was artificially driven last month by the government stimulus program “cash for clunkers”. The robust demand for automobiles last month accelerated consumer timeline for purchases and will most likely leave demand weak in the sector for months to come. Indeed, we are seeing that economist are predicting that sales minus autos rose 0.2% as stabilizing home prices and surging equity markets are ushering in a return of normal spending habits. However, shell shocked consumers are still facing rising unemployment and the large decline in the headline figure should temper prevailing optimism which could generate dollar support. Additionally, the FOMC will release their minutes from their last policy meeting which could steal the headlines and provide bullish dollar sentiment if it is viewed that policy makers are becoming hawkish. Indeed, Kansas City Fed President Thomas Hoeing stated last week that the central bank should start raising interest rate “sooner rather than later”

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