Sterling Breaks Out Following Drop in Unemployment Rate

Sterling is breaking out to fresh 3-week highs on better than expected employment numbers as Greek concerns are hitting the dollar and generating a global equity market selloff. Yield differentials have remained steady, which could mean that the turnaround in the UK currency might be transitory.

The UK claimant count and unemployment rates fell to new cycle lows as expected. The headline March claimant count dropped by 20.7k, which was less than the median forecast for a 28.0k decline, though the rate still managed to dip to 2.3%. The February unemployment rate also fell to 5.6% from 5.7%.

The percentage of people in the workforce in the 16 to 64 age bracket was 73.4% of the population, up from 72.4% a year ago. Average household income were near expectations, rising 1.7% in the with-bonus figure and by 1.8% in the ex-bonus figure in year over year figures for the three months to February. Overall, a solid report, portended by strong retail spending.

Unemployment is now at the lowest level since July 2008 and at 5.6% is within a whisker of the BoE’s 5.5% Nairu, the point at which the central bank estimates would start to trigger inflationary pressures via higher wage demands. UK fundamentals are solid, but uncertainties about the outcome of the May 7 general election should also curb the pound’s upside potential.

Sterling broke out above a short-term downward sloping trend line at 1.49 and is poised to test the mid-March high at 1.5165. Support is seen near former resistance and the 10-day moving average at 1.1411. Momentum has turned positive as the MACD (moving average convergence divergence) index generated a buy signal. This occurs as the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread.

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