Sharp drop in unemployment sends sterling higher

Tom Tong22/Apr/2014Currency Updates

GBP

The UK was treated to unambiguously good economic news last week. Unemployment dropped sharply, while inflation remained quiescent. The labour report exceeded the most optimistic expectations. The three-month rate to February dropped to 6.9% from 7.1%, and the single month rate fell to 6.6% – the fastest three month drop in this rate since the data began in 1992. In addition, the more forward-looking measure of unemployment claimants dropped a sharp 30,400 for the month, indicating that the labour market improvement is set to continue over the second quarter of 2014.

EUR

Little market moving data ahead of the Easter holidays in the Eurozone. Industrial production rose 0.2% which, combined with the previous month rise, means this indicator is tracking a 1.5% increase. This leaves overall growth in the first quarter somewhere near the 1% SAAR (seasonally adjusted annual rate) level, insufficient to make a significant dent on either Eurozone unemployment or the sustainability of peripheral sovereign debt trajectories. Meanwhile, all eyes are now on the next inflation flash report. Unless we see a significant rebound here, pressure on the ECB to cut rates will increase and the euro will continue to tread water.

USD

Last week brought solid support for our view that the winter slowdown in the US was mostly weather related. Retail sales, industrial production and housing starts all bounced nicely in March. These numbers build decent momentum into the second quarter of 2014, during which we expect GDP to grow somewhere in the 3-4% range. This level of growth would entirely make up for the weakness seen in the first quarter, which we consider to be almost entirely due to the much harsher-than-average winter experienced in the Midwest and the East Coast. As the numbers turn more positive, we expect the Federal Reserve to continue tapering its monthly asset purchases by $10 billion at each FOMC meeting, and to continue to bring forward its expectations for the timetable of interest rate hikes.

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Written by Tom Tong

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