Dismal eurozone unemployment figures add weight to argument for ECB action

Tom Tong01/May/2013Currency Updates

GBP

The pound has risen since data late last week showed the British economy avoided recession and grew by more than expected in the first quarter, causing market participants to scale back bets on more immediate monetary easing by the Bank of England.
However sterling slipped against the dollar on Tuesday, slipping away from a two-and-a-half month high, in the absence of any new evidence of further improvement in the UK economy as a survey on Tuesday showed British consumer confidence dropped unexpectedly in March. Sterling was down 0.1 per cent, off of Monday’s peak.

George Osborne has urged the Bank of England not to undermine recovery through an overzealous focus on banking stability, in an attempt to put growth at the heart of the new governor’s mandate. Furthermore Mr. Osborne noted the “short-term trade-offs” that the FPC faces: between strengthening the banking system and making sure that banks are able to increase lending into the economy, putting large concern that an excessive focus on making the banking system shockproof could create “the financial stability of a graveyard”.

Today we await Nationwide house price index, followed by the manufacturing PMI report at 9.30 BST. Both reports are expected to come in higher than last month’s readings so it would be easier for pound bears to pounce if both reports disappoint.

EUR

The EUR continued to register gains against its counterparts despite rumours of an ECB rate cut. This was possibly driven by the fact that Cyprus may be reaching a denouement, by narrow margin of 29-27 the government passed its decision to get as much as 60% of uninsured deposits above 100,000 EUR from Cyprus’ two largest banks. There are also continued rumours of an ECB rate cut, with earlier manufacturing PMI’s in the region disappointing expectations and the German economy showing wider cracks, the view is that more stimulus, if not an interest rate cut, is required of the ECB.

A rate cut is also growing more and more likely due to the eurozone’s shockingly poor unemployment numbers. Unemployment has hit a new record high, mainly driven by the devastated economies of Spain and Greece dragging the rest of the currency area into a deep and painful recession. Almost 20m are now jobless, draining the economies further as the benefits bill increases and output plunges. These dire numbers are growing increasing pressure on the ECB to act, with many analysts predicting a rate cut tomorrow but with rates at an already record low of 0.75% and the economy showing no signs of recovery, such a move is unlikely to have a big impact.

Data is scarce today with no releases due, and all eyes will be on the ECB rate decision due out on Thursday.

USD

US dollar has face continued headwinds this week against the major currencies, after weak economic US growth data reduced expectations that the Federal Reserve could start to wind down its quantitative easing programme. Pressure upon the greenback has been mounting. Low inflation figures have increased expectations of continued stimulus from the Fed. This news was compounded by a decline in the two-year Treasury yield. The US central bank’s meeting that reaches it’s climax today is expected to release news of continued bond buying. The conclusion of the two day meeting today, is also expected to bring dovish language following recently poor economic data. The dollar languished near a two-month low against a basket of currencies as investors wagered the U.S central bank will recommit to its aggressive stimulus programme, or even expand it.

With the latest economic data out of the US this week, we are seeing a mixed snapshot of the world’s largest economy. April’s Chicago Business Barometer fell by 3.4 to 49.0, a three an a half year low. A figure below 50 indicates a contraction. The business gauge follows weaker than expected US first quarter economic growth last week. With sterling / dollar; we are seeing a continued retracement from this year’s huge decline, as the UK avoided a triple dip recession. However, a report from the Institute for Supply Management provided some positive notes for the US economy. It said manufacturing growth is expected to continue in 2013, revenue should increase 4.8% and capital investment is expected to surge by 9.1%. A consumer confidence index also jumped to 68.1 in April from an upwardly revised 61.9 in March, curtailing the negative batch of economic data out of the US this week.

In summary; an unexpected contraction in the U.S. Business activity data on Tuesday, increased expectations of a slowdown in the U.S. economy. This has been sparked by a run of soft data in recent weeks, even though figures on consumer confidence and U.S home prices were robust.

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Written by Tom Tong

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