GBP/USD – US economy shaped by Generation Y as student loans surge

on Aug 8, 2013

**, Thursday 8 August:**

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Yesterday’s Bank of England Inflation Report announced the extraordinarily clear ‘forward guidance’ that borrowing costs would stay at their current and record lows until the UK unemployment rate reached the BoE’s seven percent target. The BoE believes that that level is ‘’something unlikely for another three years’’. (See chart below of a BoE projection of the unemployment rate; darker colour indicates higher probability outcome.) The joblessness rate has stayed doggedly at 7.8 percent for nearly a year now, since October 2012, with only last December’s 7.7 and this March’s 7.9 percent being exceptions.

Market observers have been left divided by the unprecedented directness, obviously given with the blessing of new BoJ governor Mark Carney. Sceptics are accusing Carney of neglecting the UK’s inflation objective while other naysayers raise the spectre of a housing bubble, notwithstanding that UK house prices remain well below their pre-recession peaks and the checks and balances now in place for risky lending.

Optimists on the other hand point to previous instances of rapid falls in the unemployment rate from 7.8 to seven percent, such as in the periods December 1996 – September 1997 and February – -December 1989, albeit market dynamics are quite different now. And the downward trend in the UK’s participation rate evident since the 2008 could adversely impact the contraction in unemployment. Many economists thus support Mr Carney’s focus on unemployment because of the fragile UK economic recovery and the need for sustainable job growth before any abandonment of accommodation.

Following the BoE’s announcement sterling surged to a seven-week high at 1.5531. Today the volatility in GBP/USD has diminished and the pound is trading in a 34-pips range, currently around 1.5505, to be 0.1 percent up for the day.
US Consumer Credit for June was reported today as a rise to $13.818 billion, falling short of analysts’ estimates for $15 billion and May’s $17.541 billion, revised down from $19.615 billion. A closer look of the number points to the vast growth of non-revolving consumer credit held by the government, a large slug of which is student loans. Some economists believe that the costs of federal student loan programmes are being understated and that they may pose a serious fiscal test for the federal government.

The rise in student loans is due to the growing impact of ‘Generation Y’, also known as the Millennial Generation, the US demographic. Generation Y encompasses the 1980-2000 period that saw a surge birth-rates across the globe, supposedly in the wave of optimism from the gradual collapse of European communism and the end of the Cold War.

US Initial Jobless Claims for last week are due out at 13.30 BST, with expectations for a rise to 335,000 from the prior period’s 326,000. The measure is a leading economic indicator, in a pronounced inverse correlation with the S&P 500.
The pound market awaits the UK Trade Balance for June, due to be released at 09.30 BST tomorrow. The consensus is for marginal reduction of the UK deficit to GBP 8.4 billion from GBP 8.5 billion in May.


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