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By HaleStewart December 18, 2013 9:29 am
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Latest UK Employment News is Pound Bullish

Earlier today, the Office of National Statistics reported that UK unemployment dropped .2%:

    The employment rate for those aged from 16 to 64 for August to October 2013 was 72.0%, up 0.4 percentage points from May to July 2013. There were 30.09 million people in employment aged 16 and over, up 250,000 from May to July 2013.

    The unemployment rate for August to October 2013 was 7.4% of the economically active population, down 0.3 percentage points from May to July 2013. There were 2.39 million unemployed people, down 99,000 from May to July 2013.

    The inactivity rate for those aged from 16 to 64 for August to October 2013 was 22.1%, down 0.1 percentage points from May to July 2013. There were 8.92 million economically inactive people aged from 16 to 64, down 45,000 from May to July 2013.

    Between August to October 2012 and August to October 2013 total pay rose by 0.9% and regular pay rose by 0.8%.

In conjunction with the latest Markit readings, this is very solid news indicating the UK economy is growing at strong levels.  While the recent spate of good news is of limited duration, there is enough solid news to indicate the UK is now growing.  The real question is will this data continue in this vein.  The solid readings from the Markit numbers indicate it will, although I would expect the recent numbers to taper a bit if only because they are so high.

While the news out of the US is good, it's simply not as strong as that from the UK -- at least not yet.  While employment growth has been strong, it's not at a rate that is high enough to absorb population growth.  In short, there isn't sufficient evidence  the US economy is at "escape velocity" -- that magican and ill-defined rate (usually assumed to be about 3%).

That leaves Fed action as the primary driver of dollar appreciation.  First, there is the assumption the Fed will begin easing during its December meeting, while others think it will occur early next year.  The timing is moot; the market has been expecting this move since May 1 of last year.  In addition, the Fed will not simply switch the program "off," but instead move out gradually, adjusting as the program progresses.  As such, we can fairly safely assume two things: first, because we've known about the taper for 8 months, it's more than likely built into prices, and 2.) when they do start to taper, it won't be so sharp an activity that it will deeply impact prices.

All that being said, let's take a look at the USD/GBP chart:

In the last six months, we see the following trends:

1.) A rally from July to October

2.) Conslidation from October to the end of November

3.) A break-out at the end of November

4.) A downward pennant pattern mid-December

5.) Prices breaking througjh resistance in yesterday's trading.

Assuming we continue to see stronger economic news from the UK, going long on the pound (a trade for the first three months of next year), would make sense, using  1.62 as technical support.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer

 

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