GBP/USD: Limited Loss On Data

 | Dec 20, 2013 07:01AM ET

GBP/USD has edged lower on Friday, as the pair trades in the mid-1.63 range. In economic news, the British Current Account deficit ballooned to a five-month high. Final GDP posted a strong gain of 0.8% in Q3, but the Public Sector Net Borrowing deficit jumped to an eight-month high. It's a quiet end to the week in the US, with just two releases on the schedule - Final GDP and Final GDP Price Index.

The week ended on a sour note for British releases, as the Current Account deficit jumped in November to -20.7 billion pounds, up from -13.0 billion a month earlier. This was much higher than the estimate of -13.8 billion. Current Account is closely linked to currency demand, as a larger deficit means a lower demand for British pounds by foreigners for domestic transactions. The pound has sustained modest losses following the release.

Thursday's US releases were dismal. Unemployment Claims jumped to 378 thousand claims last week, up from 368 thousand the week before. This was well above the estimate of 336 thousand. The previous weak release was attributed to the holiday season, but two consecutive bad releases may raise concerns about the health of the employment market. There was more bad news to follow. Existing Home Sales posted its third consecutive decline, dropping to 4.90 million compared to 5.12 million in the previous release. The Philly Fed Manufacturing Index rose from 6.5 to 7.0 points, but this was way off the estimate of 10.3 points.

After months of standing on the sidelines, Federal Reserve Chairman Bernard Bernanke finally played his hand on Wednesday. At its policy meeting, the Fed announced that it was tapering its QE program by $10 billion a month, commencing in January. This will reduce the Fed's asset purchases to $75 billion every month, comprised of $40 billion in Treasuries and $35 billion in mortgage bonds. The announcement came as somewhat of a surprise, as most analysts had expected the Fed to hold off on any QE reductions until early next year.

In its dramatic taper announcement, the Federal Reserve was careful to separate tapering from rate hike expectations. Fed chairman Bernard Bernanke stated that interest rates are likely to remain low even after the unemployment rate drops below 6.5%. Previously, the Fed had stated that it would start to consider rate increases when unemployment fell below this level. Bottom line? With the unemployment rate at 7.0%, it could be a while before we see higher interest rates in the US.

Earlier in the week, British Retail Sales posted a gain of 0.3%, up sharply from the -0.7% reading last month. UK employment numbers continued to impress in November. Employment Change continues to post sharp drops, a pattern which we've seen since mid-2013. The key indicator came in at -36.7 thousand, beating the estimate of -35.2 thousand. The unemployment rate dropped unexpectedly to 7.4%, its lowest level since May 2009. The markets had expected the rate to remain unchanged at 7.6%. Meanwhile, the breakdown of the BOE's vote on QE and the Official Bank Rate were both unanimous (9-0) decisions. At the last policy meeting, the Bank maintained QE at 375 billion pounds and the Official Bank Rate at 0.50%.