by Adam Solomon
Sterling / Euro and US Dollar
The Pound slumped to a fresh six-month low against the Euro exchange rate yesterday, while the UK currency also struggled to prevent further losses against a basket of currencies, amid speculation that the Bank of England will delay raising UK interest rates until the third quarter. The Euro also extended its gain to the highest level against the Pound since October, as investors speculate that the European Central Bank will raise rates again before the BoE.
The UK currency actually made modest gains against the Dollar in early trading, after a report yesterday showed that UK unemployment actually fell last month, despite the increase in jobless claims. Claims for unemployment benefits rose by 700 on the month to 1.451 million, while the rate of joblessness fell to 7.8%
Payrolls surged to the highest level in two years in the first quarter, which may provide some optimism to the government that the fragile nature of the economic recovery will be able to withstand the budget cuts that will result in 300,000 public sector job losses. Although the Bank of England has boosted the recovery by keeping interest rates low, consumer confidence remains weak.
Yesterday’s data also showed that wage growth slowed in the quarter through February, which will only serve to strengthen the argument that high inflation is not fueling demands for higher salaries. Subdued wage growth also reduces the pressure on the Bank of England to begin raising interest rates and that will have an adverse effect on the Pound.
Britain’s unemployment rate compares with 9.9% in the Euro-zone and 8.8% in the U.S. UK government bonds fell sharply yesterday, as global stock markets gained, amid optimism that the world economic recovery will be sustained. The FTSE 100 Index gained 0.8% in Europe, rebounding from the biggest drop in four weeks.
The improvement in risk appetite helped propel the Pound back towards 1.6350 against the U.S Dollar, while the UK currency also rose towards 1.1270 overnight, after falling to a low of 1.1209. The Pound dropped earlier in the day versus the Euro, as reports showed that inflation accelerated in Germany in France, raising the probability of further rate increases this year.
The unexpected decline in UK consumer prices has seen investors scale back expectations of an imminent rate increase to August at least. On that basis, the risks are weighted to the downside for Sterling and a further move lower appears likely versus the buoyant Euro. A report from the Nationwide Building Society overnight showed that UK consumer confidence unexpectedly rose in March.
The Pound subsequently rallied against the majority of the 16 most actively traded currencies, as an index of consumer sentiment gained from the lowest level since records began in 2004. However, the survey also showed that consumers are growing even more pessimistic about the housing market, expecting their home to fall by 0.9% in value over the next six months.
Euro / US Dollar
The Dollar weakened towards the lowest level in 15 months against the Euro in the foreign exchange rate markets yesterday, as speculation intensifies that Europe will raise interest rates again before the Federal Reserve even consider exiting ultra-loose policy measures. The single currency bounced back from an early trading dip, after inflation in the Euro-region accelerated last month.
The Euro traded at a high of 1.4520 before edging weaker through the course of the day, after data in the U.S showed that retail sales rose in March for the ninth consecutive month. Purchases increased 0.4% following a 1.1% increase the previous month, while the decline in unemployment is also easing concern over the economy.
The Fed’s Beige Book reported that the economy was expanding at a moderate pace, although some uncertainty remains over the global outlook. In the Euro-zone, immediate concerns surrounding sovereign debt and the contagion to other high-deficit countries have eased with confidence boosted by Spanish bond buying in China.
EU 09:00 – ECB Monthly Bulletin
U.S 13:30 – Producer Price Index (March)
U.S 13:30 – Weekly Jobless Claims (w/e April 8th)