UK in focus ahead of MPC minutes and unemployment data

As the situation in Europe has continued to remain dormant and equity markets have pushed to multi year highs, markets have started to turn their attention to the precarious fiscal position of the UK, and the evidence is that they aren’t particularly happy with what they see, after yesterday’s borrowing numbers showed that the Chancellor looks set to miss his borrowing targets by some distance.

The pound has slumped sharply in recent days buffeted by a number of concerns including uncertainty about an in/out referendum on Europe, which Prime Minister David Cameron will pledge to take place in 2017 in a speech this morning, as well as disappointing economic data and the possibility that the Bank of England could well opt for more money printing.

It has been suggested that David Cameron’s decision to pledge a vote on EU membership could well unsettle markets; however it is becoming abundantly clear that the current status quo is also creating just as much uncertainty. Whether this is the right approach only time will tell, but it is sure to attract a firestorm of debate and criticism on both sides of the political divide, in the UK as well as Europe.

As for last night’s speech by Bank of England governor Mervyn King the prospect of more asset purchases was not ruled out when he stated that the bank remained ready to provide “more QE stimulus, if needed”. He introduced a caveat to those remarks warning about the risk of currency wars and not sticking to the inflation target.

As an exercise in keeping markets guessing the governors speech appears to have worked quite well in that it keeps all possible policy options on the table, including a possible review of the current monetary policy framework.

With the UK economy continuing to struggle and the Chancellor struggling to bring down government borrowing, the change in emphasis raises the question as to whether political pressure is being brought to bear with respect to policy settings.

The governor went on to suggest that the government implement supply side reforms in order to help rebalance the economy, stating that monetary policy was no panacea to the ills of the economy.

This morning’s publication of the latest MPC minutes should show if there is any great shift with respect to the introduction of more QE or whether policymakers are content for the funding for lending scheme to continue to do the heavy lifting.

There is certainly evidence that it has been much more effective than the £325bn of QE done so far.

The latest unemployment figures are also due to be published with the latest ILO numbers expected to remain unchanged for the three months to November at 7.8%. The change in jobless claims for December is expected to show a rise 0.5K.

The squeeze on average earnings looks set to continue as well with a decline from 1.8% to 1.6% for the three months to November. With inflation starting to edge back towards the 3% level the squeeze on consumer’s wallets looks set to continue.

EURUSD – the euro continues to range trade between 1.3400 and support at 1.3250.
A break through 1.3400 has the potential to target a move beyond the 1.3500 200 week MA level towards 1.3835, the 61.8% retracement of the 1.4940/1.2045 down move. A break below 1.3250 where we have the base suggests a test towards the long term support line from the 1.2045 lows now at 1.3045 which remains the key level on the downside.

GBPUSD – the 50% retracement of the 1.5270/1.6380 up move at 1.5815 has so far held on the downside. A break would nevertheless probably signal further losses towards 1.5680. The 200 day MA at 1.5910 should now act as resistance. The pound needs to push back through 1.6050 to retarget 1.6130.

EURGBP – we flicked through the 0.8420 50% level but have been unable to close above it thus far. A concerted break has the potential to target 0.8576, 61.8% retracement level of the down move from 0.9085 to the lows at 0.7755. The 0.8325 level should now act as support on any pullbacks. Long term trend line support at 0.8100 comes in from the 0.7755 lows.

USDJPY – yesterday’s declines could well precipitate a deeper sell-off towards 87.80 initially with a break of 87.50 targeting the 85.00 level and the 200 week MA. To mitigate this risk we need to pull back through the 89.00 area to retarget the 90.00 level.