Pound pushed higher by upbeat unemployment data and lingering Brexit optimism; UK economic data is mixed, if solid.

The UK’s Office for National Statistics recently reported the country’s unemployment rate at 4.9 per cent in the third quarter, lower than expected at 5.1 per cent. However, unemployment is higher than September’s 4.8 percent.

November’s change in claims rose higher than expected to 64,300 after falling by 29,800 in October. Analysts had expected a rise of 50,000. That left the number of claims in November at 7.4 percent, up from the previous month 7.2 percent.

Average earnings including bonuses rose 2.7 percent in the third quarter, more than expected and from September’s 1.3 percent. Excluding bonuses, average earnings rose a better-than-expected 2.8 percent after 1.9 percent in the previous month.

“Vacancies have continued to recover recently, but are still below pre-coronavirus levels,” the ONS said in its report.

The House of Lords economy committee said on Monday that the Treasury should move away from wage subsidies and focus on boosting jobs in sectors where they are needed. The committee also insisted on helping young people, stressing that it is wrong to assume that the economy will not need support just because a vaccine is now available.

So far, 1,869,666 cases of COVID-19 have been reported in the UK, as well as 64,402 deaths, making it the second worst affected country in Europe and sixth in the world. A surge in cases has prompted London’s local authorities to consider a strict lockdown due to start on Wednesday morning.

Aside from the unemployment figures, there hasn’t been much relevant data released recently about the state of the UK economy, although some key figures were released last week.

Last week, the ONS reported that manufacturing output rose more than expected, rising 1.7 per cent (month-on-month) in October, after rising 0.2 per cent the previous month. It fell 7.1 percent year-on-year, better than the expected 8.4 percent decline and following a 7.9 percent decline in the previous month.

Industrial production also grew higher than expected, gaining 1.3 percent month-on-month after September growth of 0.5 percent. It fell 5.5 percent year-on-year, less than the 6.5 percent expected and better than the previous month’s 6.3 percent decline.

Monthly gross domestic product rose 0.4 percent, in line with analysts’ expectations, though lower than the previous month’s 1.1 percent.

Positive news on Brexit trade talks pushed sterling higher, gaining 0.78 percent against the US dollar, recovering from a 1.59 percent drop in the previous week.

“Sterling flew out of the gates at the open on Sunday after EU/UK Brexit negotiators failed to reach a deal over the weekend but agreed to go the extra mile,” commented an analyst at Western Union.

The UK is now negotiating a withdrawal agreement with the European Union and the prospects for a deal are improving after the UK Prime Minister acknowledged the need to ensure fair competition for UK and European businesses. The European Union’s chief negotiator, Michel Barnier, expressed his optimism, although he added that the path to a deal remained “very narrow”.

No significant progress has been made in this area in recent days, although both the EU and the UK have agreed to continue talks beyond the deadline. Great Britain is to leave the European Union on January 1.

As mentioned, the latest unemployment figures were better than expected at 4.9 percent in Q3, beating forecasts of 5.1 percent.

Inflation data is also better than expected, as the Consumer Price Index rose 0.7 percent in October (year-on-year). However, this figure is still well below the Bank of England’s inflation target, which currently stands at 2 percent.

On the other hand, the latest gross domestic product figure missed analysts’ expectations, although it improved from the previous quarter’s figure. In quarterly terms, GDP increased by 15.5 percent in the third quarter after a 19.8 percent decline in the previous quarter. In year-on-year terms, GDP fell by 9.6 percent, missing expectations for a 9.4 percent decline and improving from the previously reported 21.5 percent.

The Bank of England appears to be still considering the possibility of setting negative cash rates, as media recently reported that the BoE has been consulting with UK lenders to see what preparations they need to make should they decide to do so.

Not everyone is excited about this possibility. The HSBC analyst noted that the BoE’s monetary policy committee should carefully consider whether setting negative interest rates will deliver the desired results.

“Where we see places where they’ve already been introduced, Europe, Japan, Switzerland, we haven’t seen inflation pick up and growth hasn’t come back as strongly as we would have hoped,” the analyst commented.

UK Fundamental

  • Tomorrow, the ONS will publish both the Consumer and Retail Price Indices.

  • Tomorrow, Markit Economics will also release PMIs for manufacturing and services.

  • On Thursday, the Bank of England will publish its decision on interest rates.

  • Retail sales data will be reported on Friday.

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