This note was originally published January 22, 2014 at 12:31 in Macro
Editor's note: This is a complimentary look at Hedgeye research. Click here to learn more about how you can begin reaping the benefits of our world-class research used by leading money managers around the globe.
We received more positive economic data out of the UK this morning, in line with our Q4 2013 and Q1 2014 macro themes of #EuroBulls and #GrowthDivergences, respectively, that forecast a bullish outlook for UK equities and the British Pound.
- The ILO Unemployment Rate ticked down to 7.1% in NOV vs 7.4% in OCT and expectations of 7.3%.
- BOE Minutes released showed a 9-0 decision to keep the benchmark rate unchanged and the asset purchase target unchanged.
UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which we expect should provide further strength to the equity market and currency. The decline in the unemployment rate represents the largest decline in almost 5 years! Additionally we’re seeing CPI also moderated, down 10bps to 2.0% in DEC Y/Y in the last reading – we expect this cut to boost business and consumer confidence and increase purchasing power and consumption.
While the FTSE (etf EWU) is approaching immediate term TRADE overbought level, it’s trading well above its intermediate term TREND level of support.
On the currency side, we remain bullish on the British Pound versus the US Dollar (etf FXB), a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve). This was confirmed once again by the Minutes released today, which continues to stoke the Pound. The Bank said there was no need to raise rates even if the unemployment rate hits 7% in the near future.
The British Pound is holding its Bullish Formation, which we expect will continue to be supported by prudent monetary policy from the BOE and strengthening economic fundamentals.