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US Labour Market Continues To Tighten, UK’s Trade Deficit Widens

Accendo Markets
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The USD is in a falling trend after a long rally which can be attributed to a weak jobs report. Firms created only 214K jobs in the economy well below the previous reading and the forecast (non-farm employment change, Actual: 214K, Forecast: 235K, Previous: 256K, 07/11/2014). However the unemployment rate continued to fall (unemployment rate, Actual: 5.8%, Forecast: 5.9%, Previous: 5.9%, 07/11/2014).

Unemployment claims (Actual: 278K, Forecast: 285K, Previous: 288K, 07/11/2014) have also declined. The Fed recently ended QE and the release of this data comes at an important time. There are indications of the labour market tightening which justifies the Fed’s decision not to continue QE. It also gives confidence to market participants as credibility of the Fed increases, although this is one part of the dual mandate, and inflation has been below the 2% benchmark for 29 consecutive months. The Fed is therefore unlikely to raise interest rates anytime soon and they are likely to let inflation overshoot the target to get rid of any discrepancies in data. Retail sales m/m (Forecast: 0.2%, Previous: -0.3%, 14/11/2014) and preliminary University of Michigan consumer sentiment (Forecast: 87.3, Previous: 86.9, 14/11/2014) are expected to be on forecast, or just under, as the current recovery is strong and consumer confidence is increasing.

This week the Bank of England’s will release its monthly inflation report which will provide us some insight on when it may raise interest rates. On a side note, the UK trade deficit has widened due to the weak Eurozone and an increase in oil imports. Winter is just around the corner and more oil is likely to be imported for heating purposes which could widen the deficit further. The General Elections is due in May 2015 and the outcome of this could determine whether a referendum on membership of the EU will be held. Should there be a referendum and the UK votes to withdraw from the EU there could be severe economic consequences such as higher import costs and restriction on exports. Wage growth is still well below inflation and this week’s average earnings index 3m/y (Forecast: 0.9%, Previous: 0.7%, 12/11/2014) might show this. For a strong economy wage growth should be greater than inflation as this will drive consumption, which in turn will increase production.

Support 2 (S2) Support 1 (S1) Current Price Resistance 1 (R1) Resistance (R2)
1.54817 1.56936 1.59050 1.60283 1.61956

The pair is currently in a downtrend. We have identified S1 to be a weak floor for the pair which has tested this level once as a resistance level. S1 remains to be tested as a support level. S2 is also a weak floor for the pair which has tested this level once and has failed to break it.
R1 is a weak ceiling for the pair which has tested this level once and failed to break it. R2 is also a weak ceiling for the pair which has tested this level once. The white trend lines will provide additional resistance and support to the pair respectively.

Technicals: MACD (Moving Average Convergence Divergence) and MAs (Moving Averages)

• The 200-day MA (orange) and the 50-day MA (magenta) is downward sloping indicating a bearish stance for the pair. The 200-day MA and the 50-day MA will provide additional resistance to the pair.

• The MACD is above zero and in an uptrend, defined by the white trend line in the MACD indicator window, indicating that the pair is gaining momentum. The pair is also indicating a bullish divergence. The pair’s value decreased (consecutive lower lows) but the MACD is gaining momentum. The pair could therefore be indicating a reversal which could be just around the corner.

• A falling wedge is evident which supports the theory that a reversal could be around the corner. The falling wedge is indicated by the two white trend lines on the main chart. Prices are converging and if the pair breaks the upper trend line then we could see a bullish move.
In the short-term the pair is bullish. The technicals suggest that there could be reversal in the near future. Together with this both the US and UK have a problem with inflation and therefore it is unlikely there will be a rate hike anytime soon. The changes in market volatility are likely to be data dependent. Fundamentally both the UK and US are both strong.

CFDs, spread betting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.

Ajay Pankhania is a part-time Technical Analyst at Accendo Markets. You can
find out more about CFD Trading with Accendo Markets or download your free research trial, and get access to exclusive trading data. Follow me on Twitter (@AjayPankhania) at https://twitter.com/AjayPankhania.

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