Pound surges as UK unemployment falls to seven year low
15/Oct/2015 • Currency Updates•
The US Dollar plunged further against its major peers yesterday, driven lower by a string of weak economic indicator data in the US This included another disappointing set of retail sales figures that have reduced expectations for the Federal Reserve to hike interest rates by the end of the year.
Sterling, in particular, rallied hard against the Greenback, with an added boost from unemployment data, which showed the number of jobless people in the UK unexpectedly fell to a seven year low.
Today, inflation in the US is expected to return to negative territory with any downside surprises likely to weigh further on the Dollar.
Sterling staged an impressive recovery yesterday, erasing losses from Tuesday’s weak inflation data. It appreciated strongly by 1.1% versus the US Dollar to above its three week high.
Yesterday’s labour report was mixed, although generally positive for the UK economy. Average earnings growth came in marginally below expectations. Wages, excluding bonuses, grew by 2.8% in the three months to August but was slightly down on previous, while wages, including bonuses, expanded by 3%.
The focal point, however, was the unemployment rate, which surprised expectations by falling to its lowest level since mid-2008 at 5.4%. According to the ONS, employment jumped by 140,000, pushing the overall level of employment to 73.6%, its highest level since records began in 1971.
The data will be very welcome news to the Bank of England and suggests that the UK labour market is currently in a position to warrant an interest rate hike.
In other news, there were some dovish comments from new MPC member Gertjan Vlieghe, who claimed that the Bank of England still had room to cut rates rather than raise them in order to stimulate the economy. Vlieghe, already earmarked as a potential dove, will sit on the MPC for the first time later this month.
The Euro experienced a mixed performance against its major peers yesterday, with the currency falling sharply by 0.8% against the Pound, although appreciating by 0.35% versus the Greenback.
The Eurozone was mostly overlooked againyesterday, with attention firmly on significant economic releases in the US and UK. We did, however, see the latest industrial production data for August, which suggested the recovery in the Euro-area economy may be faltering. Production slumped by 0.5% according to Eurostat, with falling demand from China and East Asia likely to have been a factor. On an annualised basis, output rose by just 0.9%, its lowest since April.
The underwhelming figures will put further pressure on the European Central Bank to expand its existing stimulus programme. All eyes will turn to Mario Draghi when he speaks following the Governing Council’s next meeting on the 22nd October.
Elsewhere yesterday, Germany cut its growth forecast to 1.7% for this year amid a slowdown in China, while inflation in Italy and France both declined in the month to September.
The Greenback continued to struggle yesterday, falling across the board against most of its G10 and emerging market counterparts. The US Dollar index ended the London session 0.4% down.
Dollar weakness yesterday came amid another disappointing retail sales report, which caused many analysts to push back their expectations for a Federal Reserve interest rate hike.
Retail sales in the month to September grew by a meagre 0.1%, down on the 0.2% that had been forecast. Excluding car sales, total sales fell by 0.3% on the previous month with additional downward revisions to July and August numbers painting a gloomier picture of US consumption than was anticipated.
Meanwhile, producer prices in the US also fell short of expectations. The producer price index posted its largest decline in eight months in September, falling by 0.5% and further suggesting that overall weak price growth in the economy may provide another obstacle to a US rate hike in 2015.
A lack of data in the UK and Eurozone today will be compensated by a string of releases in the US, including inflation and jobless claims, to be released in the early afternoon.
Rest of the world
The New Zealand Dollar was one of the biggest gainers yesterday, appreciating by over a percent against USD to its highest in three months, after central bank Chief Graeme Wheeler made no attempt to talk down the currency.
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