The British Pound (GBP) has a great week so far, up against literally all other currencies. It even made new yearly highs against GBPCAD, GBPHUF, or GBPJPY. Although it is still January, the advance is relevant because the FX market is in a consolidation mode and traded in tight ranges for the entire month so far.
The reason for the GBP breakout comes from stronger than expected employment data. This has nothing to do with the current lockdown in place in the United Kingdom, as the data refers to the last month of the previous year. On expectations of 47.5k claimant count change, the U.K. economy delivered 7k. Many traders are confused about this data, because lower numbers are positive, not negative. They refer to fewer people applying for unemployment benefits than expected, and thus a net positive when compared to the forecast.
Moreover, the data comes on top of already positive data for the previous period, signaling that there are enough jobs available despite the COVID-19 restrictions and limitations.
COVID-19 May Mask Initial Effects of Brexit
Brexit couldn’t happen at a worse time. After more than four years of intense negotiations, Brexit finally came to fruition at the start of this year. Unfortunately, the market participants are focused on a much bigger problem at this point – the COVID-19 pandemic. When compared, the two have different effects on the economy, with the pandemic affecting it currently, but with Brexit projected to have bigger effects in the years to come. As such, the risk is that the good, positive data we see at the start of the year will be the effect of the economy bouncing from the COVID-19 recession, rather than the positive effects of Brexit. This is something we should all bear in mind.
However, we should give credit where credit is due. The Claimant Count Change is released one month ahead of the Unemployment Rate, and it is the first indication of the state of the labor market in the United Kingdom. Because consumer spending is highly correlated with labor-market conditions, it is a key metric in understanding the future path of the U.K. economy in the short and medium-term.
Unsurprisingly, the FX market reacted first, with the GBP shooting higher. The GBPCHF cross trades close to one-year highs at 1.22, the GBPUSD is above 1.37, and the EURGBP threatens to break below 0.88.