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The pound is one of the best performers today and has proved yet again that the markets are more than willing to rally on anything that sniffs of good news. That good news was the labour market statistics for the UK. It showed the unemployment rate falling to 8.1% in June from 8.2% in May, the number of jobless falling by 5.9k in July and the economy producing more than 200,00 jobs in all in Q2.

UK jobs data is too good to be true

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, even the Bank of England Governor Mervyn King called it "puzzling". The data suggests that about half of the jobs are for part time workers, so it's not all rosy. It may also point to a drop in productivity in the UK - it now takes more people to generate growth than it did prior to the recession in 2008. Another explanation is that businesses have been keeping hold of their workforce and "skill hoarding" while they wait for the upturn. Also, employment may have been generated in the lead up to the Olympics. The latter may have had a big impact as the bulk of new jobs were created in London. In some parts of the UK the unemployment rate actually rose in June.

But none of these explanations suggest that the UK jobs market will have a happy ending. 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. Also, the Olympics is likely to have provided a temporary boost to the figures, and it is unlikely that the Olympics "legacy" will be able to hire the same amount of people. So the labour market is still at risk of deterioration late this year.

One to Watch: Sterling

Where does that leave sterling? The jobs data may have stolen all the headlines today but the other thing to point out is the voting pattern at the Bank of England, the vote was unanimous and all nine members voted 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. Although the minutes said that the decision for some members was "finely balanced" the outlook hasn't deteriorated enough to prompt a second consecutive bout of QE. This is considered "hawkish" however the markets may be over-reacting as the Bank rarely acts in two consecutive months so it doesn't suggest to me that there has been a decisive shift to the hawkish camp since July, rather the Bank remains in wait and see mode and will act if the situation deteriorates further. Even so, UK Gilt yields have jumped on the latest data after putting in a temporary bottom at 1.43% earlier this month; hence there is some basis for the jump higher in sterling today, as currencies tend to rally when yields move higher.

UK - US yield spread and GBPUSD:

Source: and Bloomberg

However, as you can see in the chart above, the yield spread between the UK and the US needs to play catch up with the pound (this yield spread and GBP usually move fairly close together but have diverged of late as sterling has remained extremely resilient), so there may not be that much fuel left in sterling's tank. The failure (so far) to get above the 1.5750 mark - the 200-day sma, suggests to me that the bulls are a bit wary of pushing the pound into a new paradigm. Thus, 1.5750-70 could be a double top for this pair. We will be looking closely at the weekly close for this cross, a close below 1.57 could get the bears excited. Support lies at 1.5630 (a cluster of daily smas) and then 1.5615 in the short term. The weakness in sterling could also weigh on GBPJPY, which has had a stunning run recently. If it fails to close above 123.75 (the Ichimoku cloud base) in the next couple of days it suggests the bears have won the argument and the cross may stay in downtrend territory for some time. This could cause a steeper decline back to the 122.50 level in the coming days.

Chart 1: GBPUSD daily



Chart 2: GBPJPY: Daily



Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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