Sterling shines, buoyed by better-than-expected unemployment news
16/Sep/2013 • Currency Updates•
The start of the trading week was once again GBP. The decidedly positive tone in macroeconomic news contrasted with the slowing trend that is appearing across the Channel as well as across the Atlantic. The pound broke through recent highs against most major currencies, while most other G10 crosses remained bound within the ranges of the past few weeks. The succession of Bernanke at the head of the Fed provided a shocker over the weekend, as Obama’s favourite Larry Summers withdrew his candidacy. This prompted a swoon in the dollar rate, since the current frontrunner for Fed chair, Janet Yellen, was perceived as more dovish. We expect this sell off to be short lived.
All eyes were fixed on the release of the official labour report last week. Now that the Bank of England has explicitly tied policy tightening to the unemployment level, this release has become by far the most critical piece of economic information released in the UK. The report fully confirmed the recent streak of solid data. The unemployment data fell 0.1% over the three months to July, and this was driven entirely by strong private sector hiring rather than labour force withdrawal. The unemployment level is now on a path to fall faster than the BoE expects. Therefore, communications from the MPC will take on an added importance, in order to gauge members’ reaction to these news, and whether the Bank is likely to revise its expected path of hikes closer in line with market expectations. FX markets reacted as one would expect, sending Sterling higher, yet again, against nearly all major G10 currencies.
Data out of the eurozone last week offered a sharp contrast to the releases across the Channel. Industrial production was extremely weak, dropping 1.5% in July; previous month levels were also revised down. The net result is that July industrial production was running about 5% below the second quarter levels, which raises the real possibility that third quarter growth will be again negative. This data, with the failure of Spanish and Italian labour markets to stabilize, confirms our view that the eurozone’s exit from “permacession” is not yet at hand, and that growth levels there will be either flat or far too low to make a dent in the unemployment levels for the foreseeable future.
Macroeconomic news in the US also had a rather weak tone. August retail sales and July business inventories both came in below expectations, and both of them feed directly into GDP growth numbers. Together with the weakish labour report we saw last week, this leads us to believe that Bernanke will delay any start to the “tapering” of QE until October. Moreover, our view is supported by the surprising withdrawal of Larry Summers from consideration to succeed Bernanke. He had been favoured by the White House over the more dovish Janet Yellen, but decided to drop out of the race on the face of stiff bipartisan opposition to his candidacy. The fact that the uber-dovish Yellen is now the presumptive successor makes it more likely that the taper will proceed at a slower pace than markets are expecting. In view of these unexpected developments, we will be revising our short-term dollar forecasts somewhat lower this week.