The Pound Will Not Rise without Orders from King

The number of unemployed people fell again in Britain, quite impressively. This doesn’t seem enough for the Pound. The key is in the hands of Mervyn King, which sees the dark side of the economy.

Claimant Count Change, the earliest and most important indicator for British employment, fell by 15,200 jobs in December. This is the second month in a row that the number of unemployed people drop in Britain. Also the Unemployment Rate, a figure that relates to November, dropped back to 7.8%.

The big turnaround was last month when it was reported that 6,300 were relived of unemployment. This number was revised to 10,800 this time – even better. And now, a drop of 3,300 people was predicted, and the number was almost 5 times more. This looks like a positive trend in British employment.

But the Pound didn’t budge. It initially rose from 1.63 to 1.6325, no big excitement, and afterwards fell back to 1.6295, at the time of writing. Also against the Euro, the Sterling didn’t move after yesterday’s sharp EUR/GBP move.

Yesterday we saw rising inflation in Britain, and today another strong improvement in employment. Both key figures mean stronger economic activity. This should eventually trigger a rate hike. A rate hike will push the Pound higher.

Despite these numbers, no rate hike is in the horizon. Mervyn King made a public appearance yesterday and cooled down such expectations. He said there’s no danger of inflation and focused on the problems of the economy, especially on the big government deficit:

King also suggested that the bank’s task is complicated by doubt on how fast the next government will cut the budget shortfall. Chancellor of the Exchequer Alistair Darling told lawmakers last month Britain’s budget deficit will be 611 billion pounds ($994 billion) in the four years through March 2013, 5 billion pounds more than previously forecast.

His speech hurt the Pound immediately, and has an impact today, as strong employment numbers can’t support a rise of the currency.