Will the UK unemployment rate surprise the market?

Last week the Bank of England decided to keep the country's interest rates unchanged at 0.5%. Focus now turns to December's unemployment rate and the Quarterly Inflation Report due on Wednesday February 16 at 9:30 and 10:30 GMT respectively.

The BoE continues to follow a loose monetary policy in an effort to boost an economy deeply hurt by recession. The country's sluggish growth was made more evident after fourth quarter Gross Domestic Product (GDP) shocked the markets by showing a disappointing 0.5% contraction of the economy while economic analysts argued for a 0.5% expansion.

Unemployment in the UK is the weakest link in the UK's recovery path. Since the global financial crisis began, a record high number of people lost their jobs or could not find a job and, as a result, the country's unemployment rate rocketed to 7.9%. Why does the labor sector attract so much attention? The reason is that the labor market reveals a healthy or problematic economy. The high unemployment in the UK is the product of the sluggish growth that burdens the country since it entered recession. The situation does not seem to improve especially after the government's austerity measures and this year's VAT hike.

It seems that BoE's move to keep the country's interest rates at low levels was a simple decision to make. Slow growth indicates for lower interest rates.  Not so fast though. Unemployment is not the only serious issue that the UK is facing. The economy also suffers from a rising inflation. Consumer Price Index (CPI) revealed that the country's inflation rose as high as 3.7% while the central bank's target is only at 2%. An escalating inflation can hurt consumer spending and, in turn, can further cause a contraction of the economy. It is a very worrying economic situation for the UK as it is forced to deal with a slow growth as well as rising price levels. The central bank's main tool to fight inflation is by increasing the interest rates. But such move is not wise in a time while economy battles to heal from the crisis. Thursday's unemployment rate and Inflation Report will provide the market with a clearer insight about the economy and interest rates.

Will the unemployment rate surprise the currency market and decline below a stubbornly high level? If this occurs then strength will be added on the view that the UK is recovering. This will, in turn, raise expectations of a rate hike in the next interest rate meeting, which may boost the sterling. The Quarterly Inflation Report is also expected to have a large impact on the market. Speculators expect a hawkish Inflation Report which will cause extreme volatility in the currency market. Usually better than expected figures cause the currency to rise and vice versa. Whatever the outcome, it is certain that it will be an interesting day to trade!! 

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