Sterling rallies against major currencies for third day despite mixed UK labour report
12/Nov/2015 • Currency Updates•
The Pound continued to claw back ground against the Dollar and the Euro yesterday after suffering heavy losses last week on the back of a very dovish Bank of England monetary policy statement.
This came after a mixed labour report in the UK, which showed that the rate of unemployment fell unexpectedly in September to a fresh seven-year low of 5.3%. At the same time wage growth dipped slightly in the three months to September.
Businesses in the UK and Europe are paying close attention to indications as to when the ECB may increase its quantitative easing measures.
The Euro held its own against the Dollar on Wednesday, due to a lack of announcements in the Eurozone and US. However, Mario Draghi drove the Euro sharply lower this morning by providing further evidence that the ECB will be ramping up its monetary easing next month by claiming signs of a turnaround in core inflation had “weakened”.
Draghi reiterated that risks to price stability will be monitored, with the degree of monetary policy accommodation “re-examined” at the next meeting. This reaffirms our belief that the ECB will be increasing its QE programme in December, which should weigh heavily on the Euro.
With greater polarisation of relative values between the three major currencies over the medium term, the risk of losing a significant part of the gross profit margin is a concern for businesses.
Focus for traders of the major currencies today will be on the fallout from Draghi’s comments, and a string of further speeches from key Fed members, including Chair Janet Yellen.
Major currencies in detail:
Another good trading session for the Pound saw Sterling appreciate for the third straight day against both the US Dollar and the Euro. The UK currency ended 0.3% higher versus the Dollar.
Yesterday’s labour report from the Office for National Statistics painted a mixed picture regarding the strength of the UK labour market. On the positive side, the rate of unemployment fell unexpectedly in September to 5.3%, with the number of people out of work in Britain declining by 103,000 in the three months to September.
However, wage growth was particularly disappointing. The measure, closely watched by the central bank, showed that earnings growth, excluding bonus payments, dipped below forecasts by 0.3% to 2.5%, while growth including bonus payments remained unchanged at 3%.
The Pound’s reaction suggests this dip in data did little to alter expectations of when the Bank of England will raise interest rates, with most economist polls now implying a rate increase in the second half of next year.
Meanwhile, Governor Mark Carney spoke in London yesterday, although he did not touch on monetary policy.
No major economic data out of the UK economy today means that most attention for Sterling traders will likely be on events elsewhere.
The Euro mostly held its own against the Greenback yesterday, possibly due to a lack of major announcements or releases. The single currency ended the session 0.2% and 0.4% down versus the US Dollar and Sterling respectively.
Yesterday ECB President Mario Draghi left Euro traders disappointed, when he spoke at a Bank of England event in London. He omitted any mention of monetary policy in his speech, which was instead mostly about governance and regulation in increasingly integrated European financial markets.
However, this was starkly contrasted by Draghi’s speech this morning at the European Parliament’s Economic Committee, where his comments reaffirmed our expectations that the ECB will increase its QE programme next month.
From a data perspective, wholesale prices continued to decline in Germany. The wholesale price index, which measures the value of sales made by wholesales, fell by 0.4% in the month to October as a result of persistently low oil prices, which have driven inflation in the Euro-area lower all year.
Fallout from Draghi’s comments this morning will be the focus today. A busy day will also see the release of industrial production and German inflation figures in early morning trading.
The US Dollar was mostly unchanged against its major peers yesterday, with a bank holiday to mark Veterans Day limiting Dollar movement.
There were no economic announcements of note yesterday, with the modest decline in the currency mostly related to technical, rather than fundamental, factors. The very volatile measure of mortgage applications was the only release, which showed a slight dip last week of 1.3%.
Chair of the Federal Reserve Janet Yellen will be making opening remarks at a conference in Washington at 2:30pm GMT today. In addition, Fed members Evans and Dudley will also be speaking on the economy and policy in Chicago and New York respectively this afternoon.
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