The Pound to US Dollar exchange rate (GBP/USD) improved by just over a cent to 1.6230 yesterday as markets reacted to a disappointing US Non-farm Payrolls report.
The dreadful 148,000 print, missing analysts’ forecasts of 180,000, shows that the world’s largest economy is not ready for a reduction in stimulus. The Federal Reserve maintains a remit to continue purchasing $85 billion of assets each month until the labour market improves considerably. With the average number of jobs created in America down from 209,000 a year ago to just 143,000 in the third quarter, the Fed’s surprise decision last month not to taper is QE3 programme has proved to be a wise one.
The latest jobs number make for even more grim reading when you consider that October’s figure is likely to be even worse due to the nullifying effect that the 16-day government shutdown is predicted to have had on business sentiment and therefore job creation. The political impasse is also estimated to have cost US GDP around $24 billion, equivalent to -0.6%, which merely adds to the mood of pessimism regarding the US economy.
Federal Reserve policy-makers would be fools to reduce stimulus during this period of uncertainty, and speculators now expect the Central Bank to continue easing at the current pace until March. There is even an extremely dovish camp of traders who feel that Janet Yellen’s imminent replacement of Ben Bernanke at the head of the Federal Reserve could delay the taper until 2015. Although this is probably a case of excessive negativity, the point remains that Fed stimulus is likely to remain a constricting force on US treasury yields for some time to come, and subsequently the ‘Greenback’ is going to find it hard to halt Sterling’s stampede if British data continues to impress.
Sturdy UK Retail Sales and Employment figures last week helped to get the Pound back on track, contributing to GBP/USD’s two-cent appreciation, and if this morning’s Bank of England Minutes report features a positive slant on things then it is possible that Sterling’s ascent could accelerate.
It is possible that BoE policy-makers expressed concerns regarding the US government shutdown, which was in effect when the Monetary Policy Committee met, however, it is more likely that MPC members struck a bright tone overall.
On Friday the Office for National Statistics is due to release its first estimate of UK GDP for the third quarter. Median forecasts suggest that the British economy accelerated from 0.7% growth in the second quarter to post an expansion of 0.8% in Q3. If this figure is bettered, and there is a considerable possibility that it will be, then Sterling could quite easily breach technical resistance at 1.6300, reaching a 10-month high in the process.
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