Positive UK data surprises expectations as unemployment drops to 7.7% which leads to further strengths of the sterling

Tom Tong12/Sep/2013Currency Updates

GBP

The carousel of positive data continued for the U.K yesterday. Sterling soared to 7.5-month highs against the euro and 8-month highs against the dollar. Across the board it traded at strong levels against its usual pairs. This was caused by the release of unemployment data. Unemployment in the U.K dropped to 7.7% between May and July, from 7.8% in the previous three months. This means 24,000 more jobs were created. The numbers claiming Jobseekers Allowance fell for the tenth consecutive month – this time to it’s lowest level since February 2009. The fall in July and August was the largest drop in a 2-month period since June 1997. George Osborne proclaimed that “the good times are back” . This statement could be perceived as cocky and risky perhaps, however, with such a staggering amount of positive macro- and microeconomic data over the past quarter, it could well be true.

However, Ed Milliband stressed the uneven nature of the recovery. Unemployment is falling rapidly but we have the largest part time workforce since records began – 1.45 million part-time workers. A third of these people want to work full time but can’t find jobs. Average pay has rose 1.1% The governments recovery plan focuses on diversifying the economy- less reliance on manufacturing, financial services and the public sector. Manufacturing is still plummeting whereas financial services are performing well. The public sector has shed few jobs. The job market growth is buoyed massively by the property sector where 23.05% of net jobs growth has come from real estate. It will come as little surprise to any stakeholders in the London or S.E property market that 1 in 4 new jobs is in property. We have more estate agents than builders. Half a million in all – ratio that is highest in the Western world. Of these 0.5 million, 900,000 home sales were closed in the last financial year. That is 1.6 deals per agent, with a market fueled by low interest rates and the controversial government help to buy figure. Hardly a situation that seems sustainable.

Mark Carney would have been watching the release with immense interest.The rapid pace of growth is casting doubt on the BOE forward guidance plan. The BOE has stated that they will not look to alter interest rates till unemployment hits 7.0% which they have priced in for 2016. However, the market has priced in a change for next December. They feel that Carney will change his stance and use the caveats in the plan to change interest rates before 2016. BOE policymaker David Miles yesterday defended the central banks guidance on interest rates saying the recent rise of borrowing costs in financial markets was due to the U.K’s strengthening economy.

USD

In absence of any note worthy data yesterday the Dollar remained under pressure, seeing it struggle at 9-month lows against Sterling, with markets chipping away at recent gains.

The dollar index stood at 81.518, having fallen as far as 81.445 overnight, breaking below its 200-day moving average and has lost more than 1% from a 7-week peak set on Sept. 5. This was largely attributable to U.S. Treasury yields dipping, with the benchmark 10-year slipping to 2.912%, pulling back from a two-year high of 3.007% which was reached last Friday.

Facing growing expectations that the U.S. Federal Reserve’s impending stimulus reduction might be smaller than some had originally believed, now expectations stand at $10-15 billion. This coupled with the impending likelihood of an immediate U.S. military strike on Syria, also continues to undermine the dollar as diplomatic efforts to place Syria’s chemical weapons under international control intensified.

Today the only data of only merit will be unemployment claims

EUR

A seemingly riskier sentiment amongst investors was highlighted yesterday as Germany’s borrowing costs climbed to above 2%, its highest in 2-years at the 10-year bond auction. The auction saw the yield at its highest point since October 2011 at 2.06% as 4.076Bn euros were raised.

Though previously forecasting a 1.2% increase in growth in April yesterday saw the French Government drop its growth prediction for next year to 0.9%. The single currency’s second largest economy has predicted growth of 0.1% for 2013.

The cost of Italian bonds increased at an auction yesterday off the back of looming political instability. The state is set to issue an increased amount of debt for 2013 than previously thought.

Today we await the ECB Monthly Bulletin in which we will see the statistical data evaluated by the governing members pertaining to latest interest rate decision. We will also be seeing ECB President Mario Draghi speaking in the Latvian capital of Riga.

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Written by Tom Tong

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