GBP/USD – Pound Jumps as UK Unemployment Rate Dips

GBP/USD is up about 100 points on Wednesday, as the pair trades at 1.5360 in the European session. The pound received a boost as the unemployment rate fell to 5.4% in September. Unemployment Claims, however, rose to 4.6 thousand, which was higher than expected. Another key indicator, Average Earnings Index, remained edged higher with a 3.0% gain. Traders should keep a close eye on three key US releases later on Wednesday – Core Retail Sales, Retail Sales, and PPI. Any readings which miss expectations could lead to sharp movement by EUR/USD.

The pound is up sharply on Wednesday, boosted by a drop in the unemployment rate, which fell to 5.4% in September. This marks the lowest rate we’ve seen since 2008. Although unemployment claims were up in September, the markets chose to focus on the unemployment rate as well as a strong Average Earnings report of 3.0%, which was within expectations. The British economy is showing some signs of strength, but remains handicapped by negligible inflation levels. CPI, the primary gauge of consumer inflation, came in at -0.1% in September, shy of the estimate of 0.0%.  The UK economy has been performing well and wage growth has risen, but a rate hike in the near future remains unlikely, given the persistently weak inflation levels. With a rate hike still a possibility in the US before the end of 2015, monetary divergence between the US and the UK continues to favor the dollar and will this could weigh on the pound.

The Fed minutes last week were a disappointment, as the Fed did not provide any indication of when it might raise rates. So the key question remains – will the Federal Reserve press the trigger and raise rates in 2015? The markets had circled September as a likely candidate for a rate hike, but the Federal Reserve remained on the sidelines yet again. The Fed released the minutes of its September policy meeting last week, and indicated that the Fed does not feel that the timing is appropriate for a rate hike, but provided few clues as to when the Fed might take action. Policymakers cited concerns that the sluggish global economy could affect the US economy.

Federal Reserve policymakers are strongly divided on the question of a rate hike in 2015. This was underscored on Monday by FOMC member Lael Brainard, who stated that the Fed should not raise rates before global economic conditions improve. Brainard noted that the Chinese slowdown has caused economic turmoil worldwide, and the US economy could lose steam due to weaker exports and weak global economic conditions. Clearly, Brainard is of the view that the Fed should take its time and proceed with caution. With global economic conditions unlikely to change anytime soon, a rate move may be on hold unless the US posts some key releases, such as GDP or employment numbers, which match or beat expectations.

A very different view was put forth on Monday by another FOMC member, Dennis Lockhart. Lockhart, considered a centrist on monetary policy, sounded more optimistic about a rate hike before the end of 2015. Lockhart did not rule out a rate hike in October, and added that the Fed would have more data to evaluate before its December policy meeting. With FOMC members sending out such conflicting messages, it is no wonder that the markets have been unable to get a handle on the timing of a rate hike, and this failure of the Fed to communicate a clear message to the Fed has hurt the US dollar, as we saw after the release of the Fed minutes last week.

GBP/USD Fundamentals

Wednesday (Oct. 14)

• 8:30 British Average Earnings Index. Estimate 3.1%. Actual 3.0.%.
• 8:30 British Claimant Count Change. Estimate -2.3 thousand. Actual +4.6 thousand.
• 12:30 US Core Retail Sales. Estimate -0.1%.
• 12:30 US PPI. Estimate -0.2%.
• 12:30 US Retail Sales. Estimate +0.2%.
• 12:30 US Core PPI. Estimate +0.1%.
• 14:00 US Business Inventories. Estimate +0.1%.
• 18:00 US Beige Book.

Upcoming Key Events

Thursday (Oct. 15)

• 12:30 US CPI. Estimate -0.2%.
• 12:30 US Core CPI. Estimate 0.1%.
• 12:30 US Unemployment Claims. Estimate 269K.
• 14:00 US Philly Fed Manufacturing Index. Estimate -1.8 points.

*Key releases are highlighted in bold

*All release times are GMT

GBP/USD for Wednesday, October 14, 2015

GBP/USD October 14 at 11:50 GMT

GBP/USD 1.5364 H: 1.5374 L: 1.5252

GBP/USD Technical

• GBP/USD was uneventful in the Asian session but has posted sharp gains in the European session.
• 1.5485 is the first resistance line.
• 1.5341 has switched to a support level following the pound’s sharp gains.
• Current range: 1.5341 to 1.5485

Further levels in both directions:

• Below: 1.5341, 1.5269, 1.5163 and 1.5026
• Above: 1.5485, 1.5590 and 1.5660

OANDA’s Open Positions Ratio

GBP/USD ratio is showing strong movement towards short positions on Wednesday, as short and long positions are evenly split. This is consistent with the pound’s strong gains, which has resulted in additional long positions being covered.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.