by Adam Solomon
Sterling / Euro and US Dollar
The Pound extended its decline against the resurgent Euro exchange rate yesterday, falling under 1.1350, after the latest jobless figures showed that unemployment claims rose in April at the fastest pace since January 2010. The report is just the latest indication that the economic recovery is at a fragile state, particularly considering that the full extent of the government’s austerity measures have yet to be implemented.
Claims for jobless benefits increased by 12,400 to 1.47 million last month, although the level of unemployment actually fell to 2.46 million people in the quarter through March. The government is hoping that the private sector supports job growth this year, as officials cut roughly 300,000 public sector jobs over the next four years in an attempt to rein in the budget deficit.
The unemployment rate is likely to rise further over the coming months, which will impact on manufacturing output and particularly services sector growth through consumer spending. Elsewhere, the Pound didn’t receive any benefit from the Bank of England minutes, which showed that policy makers voted 6-3 to keep interest rates unchanged at a record low this month.
The majority warned that raising rates at this stage of the recovery could weigh on consumer spending even more and risk another slump. The outgoing Andrew Sentance maintained his recommendation for a 50 basis point increase, but his term on the MPC will end this month and his replacement is expected to adopt a more dovish stance, making it increasingly unlikely that we’ll see a near-term rate increase.
The Bank of England’s chief economist Spencer Dale and Martin Weale also voted to raise interest rates by 25 basis points this month and the other five members voted for no change. Adam Posen remained steadfast in his recommendation for further quantitative easing to support the economy. A statement from the MPC said that “an increase in bank rate in the current circumstances could adversely affect consumer confidence, leading to an exaggerated impact on both spending and firms’ perceptions of their desired productive capacity.”
Recent economic data has also showed that UK inflation rose at the fastest pace since 2008 at 4.5% last month and combined with the unemployment figures, household spending and consumer confidence is suffering. The Pound remained lower against the Dollar, trading as low as 1.6133 this the course of the day. Following the data yesterday, investors scaled back expectations on the sterling overnight interbank average for a rate increase in January.
The UK economy grew just 0.5% in the first quarter of the year, barely enough to wipe out the contraction at the end of 2010, and policy makers dare not raise interest rates at such an uncertain time. The BoE said there are risks to growth from the European sovereign debt crisis and that the contribution from the next trade remained “disappointing.”
The Bank’s quarterly inflation report published last week showed that inflation will probably exceed 5% over the coming months, amid rising commodity prices and a weaker Pound boosts import costs. Yesterday’s figures have fueled debate over the government’s deficit reduction plan, especially after the German and French economies grew faster than the UK in the first three months of the year.
The Pound continued its downward move against the Euro exchange rate overnight and lost ground versus the majority of the 16 most actively traded currencies, after a report from the Nationwide Building Society showed that UK consumer confidence fell in April. An index of sentiment dropped to a reading of 43, from a revised 45 in March, as retail sales climbed just 0.8% in the last month. The focus this morning will fall on the government’s official figures for retail sales growth with the report expected to show a 2.5% annual increase last month.
Euro / US Dollar
The Euro exchange rate rallied against the U.S Dollar exchange rate for a fourth straight day yesterday, rising to a high just above 1.4280 before drifting weaker towards the close of trading last night. There was further uncertainty surrounding the Greek debt situation, amid intense speculation that the struggling nation will require some form of restructuring.
European Central Bank member Bini-Smaghi warned of the potential repercussions to Greece’s banking sector that restructuring would pose and there were wider concerns surrounding the European banking sector. There seems little chance of early relief the situation as EU government will have to wait until the IMF report on Greece is prepared in early June.
There were no U.S economic reports of note yesterday but further speculation that the Federal Reserve will keep interest rates at ultra low levels this year continues to undermine the Dollar. The FOMC minutes reported that there was a discussion about exit strategies from the Fed’s quantitative easing plan and disagreements of the timing of any potential monetary tightening.
U.K 09:30 – Retail Sales (April)
U.K 11:00 – CBI Industrial Orders (May)
U.S 13:30 – Initial Jobless Claims (w/e 14th May)
U.S 15:00 – Existing Home Sales (April)
U.S 15:00 – Leading Indicators (April)
U.S 15:00 – Philly Fed Business Survey (May)