Dollar strengthens against pound and euro following rising UK unemployment, and ECB suggestion of eurozone interest rate cut

Tom Tong18/Apr/2013Currency Updates

GBP

Whilst Britain said farewell to the Iron Lady yesterday, the pound lost ground against both the dollar and the euro during yesterday’s session. Whilst Chancellor George Osborne shed a tear for Thatcher, the austerity measures he has implemented continued to bite the UK economy and a recovery seems some way off. The pound slid the most in six weeks against the dollar as figures released by the ILO showed joblessness has risen by 70,000 in the last three months. According to their figures the unemployment rate rose to 7.9% from 7.8% previously; the first drop since 2011. This relative stagnation is in stark contrast to the situation in the US labour market which continues to improve despite the blip with last months NFP.

The MPC minutes from its April meeting were released yesterday and the picture remained consistent with previous months. Mervyn King, who favours further QE, was out-voted by his peers with the poll standing at 6-3 against extension of asset purchases. However, the pound suffered on the back of this release as investors are starting to believe that the BOE will act aggressively (through further QE) to stimulate growth if employment figures do not pick up. As such, we could see more MPC members moving into King’s camp at the next meeting. Despite this gloom, the Bank Agent’s Survey had an upbeat tone with its summary of business conditions showing retail sales, housing market activity, manufacturing exports and business services turnover all improving.

EUR

The eurozone was hit by a raft of negative news yesterday culminating in Germany suffering a downgrade in its economy to A from A+ by Egan-Jones. It states that the Germany is likely to be outvoted by other ECB members to share liabilities of EU Bonds and will therefore have a greater prospective exposure. In addition, they forecast that German debt will rise to 100% of GDP from just over 80% in 2011. This downgrade could be greeted by the markets in one of two ways; either as Egan-Jones, benign outside the three major credit agencies, taking the opportunity to create a name for themselves or, more worryingly, the start of a trepidation that Germany is suffering from supporting the peripheral states.

The eurozone economy once again suggested it was far from a recovery as new car registrations were down 9.8% in the first three months of the year compared to the same period in 2012. This was the 18th straight month of decline. While registrations in the UK were up by 5.9%, they crashed by 13.9% in Spain, 16.2% in France and 17.1% in Germany. Construction activity also sank again in February to its lowest level since 1996. The construction industry fell 0.8% compared to January according to the seasonally adjusted figures released by Eurostat.

The interest rate of 0.75% in the eurozone could soon be cut according to central banker Jens Weidmann, who stated that the ECD may drop the rate. Weidmann, who is also president of the German Bundesbank, admitted that the ECB may adjust monetary policy in response to new information in the coming months.

USD

The dollar strengthened against both sterling and the euro throughout yesterday’s trading session. Last night we saw the release of the Fed’s Beige Book, showing an improved outlook relative to the last release. Summarised, it stated that activity in the US economy increased from February to April and employment is moderately following suit. Bank of America posted a rapid increase in profits, owing to a slashing of 16,000 jobs and a 30% reduction in its funding for “Bad Loans”. This reshuffle of the Bank, bringing it further out of vulnerability, has also been a technique utilised by JP Morgan, Goldman Sachs and Citigroup. All of these Banks have cut loan reserves, for Bad loans, and as a result will be able to lend more to deserving projects. This can only spell good things for those in need of credit from an up till now, “risk averse” banking sector.

Today’s notable data releases for the US include: Initial jobless claims and the Philadelphia Fed manufacturing survey. The consensus for initial jobless claims is marginally worse than the last figures, with a small amount of volatility expected surrounding it’s release. Manufacturing data out from Philadelphia is expected to show an improvement on the last release, again with a small amount of volatility following.

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Written by Tom Tong

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