Sorry, Newton
Every action must have an equal and opposite reaction. Well, it’s a good job then that Newton’s third law referred to an object rather than a financial asset in motion. Otherwise, you might find it rather hard to explain away the effect of labour market data on GBP early on this morning. First, for context, a reminder of the data event in the US that sent stocks plummeting to recent lows. On Friday 2nd July 13:30 BST, unemployment statistics in the USA were released. The headline non-farm payrolls number showed fewer jobs added in July than expected but crucially unemployment measures 0.2% higher than previous and forecast at 4.3% vs. 4.1%.
What ensues is a significant sell-off in USD and many US equities. Come Monday the impact of the data point has led markets to reprice all expectations and semi-melt down across the world. So how then, if the UK unemployment rate this morning registered 0.3% lower than forecast and 0.2% lower than previous, did even UK let alone global markets barely blink? The numbers were clear: the unemployment rate was expected to deteriorate to 4.5% from 4.4% and instead recorded at 4.2%. Within such a context, the 20 pip move in GBP spot prices observed so far this morning can hardly be thought of as an equal and opposite reaction. Are markets skewed so heavily in favour of bad rather than good data? Is the UK too small to care about such data? Or does the labour market just not matter so much here as it does in the US?
The answer is a bit of all three but what is crucial to appreciate is the latter. With a dual mandate over the labour market and price levels, unemployment is a key variable to determine Federal Reserve policy decisions. With the Bank of England not formally charged with a mandate to achieve full employment like its US counterpart, it should have a lesser impact upon policy decision making. Still, we could see some divergence-driven Sterling buying from this level based upon the solid data point. However, until markets receive UK inflation data at 07:00 BST tomorrow, any significant position adjustment is likely to be withheld.
Discussion and Analysis by Charles Porter
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