by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound traded higher against the U.S Dollar yesterday, breaching the 1.65 level by midday in London, while the UK currency remained relatively unchanged against the majors, despite the Bank of England minutes revealing that all nine policy makers voted to keep interest rates unchanged this month. Adam Posen maintained his call for an extension to the bond-purchasing program for the 11th consecutive month.
Spencer Dale and Martin Weale have been consistently voting to hike rates to combat rising inflation have withdrawn their recommendation, due to increased concerns over the sustainability of the economic recovery. It was the first unanimous vote on interest rates since May 2010 and provides an indication that the MPC are unified in their efforts to support growth.
UK consumer prices have reached 4.3% in the latest monthly figures, forcing the BoE governor Mervyn King to write a seventh letter of explanation to the Chancellor George Osborne. The Bank of England are caught between a rock and a hard place. Policy makers need to lift rates to combat rising consumer prices, but can’t risk dampening the economic recovery even further.
The latest employment data was weaker-than-expected yesterday, as the unemployment claimant count rose 37,100 for July, the largest increase for two years, after a revised 31,300 increase the previous month. The jobless rate also unexpectedly rose to 7.9%, from 7.7% previously, but the Pound stood firm after breaching 1.65 versus the Dollar.
The figures suggest the labour market is weakening at the same time as the debt crisis in Europe intensifies and spreads to other high deficit nations. Even France is not exempt from speculation of a credit-rating downgrade and concerns over sovereign debt and contagion will continue to undermine confidence in the Euro in the near-term.
The UK claimant count rate rose to 4.9% in July, the highest level since February 2010, from 4.8% the previous month. Claims for jobless benefits continue to be boosted by changes to benefit rules affecting women, though this does not explain all of the increase. The government’s austerity plan will eliminate 300,000 public sector jobs over the four-year period and officials are hoping that the private-sector will pick up the slack.
A separate report that UK wage growth accelerated to 2.6% in the second quarter, from 2.3% in the period through May, which reflected bonuses over the period. Basic salary increases, excluding bonuses, were little changed at 2.2%, underlining the squeeze on household incomes at a time when retail price inflation is 5%.
There were further concerns over the economy, but the majority of members decided that it was not appropriate to expand quantitative easing at this time, especially given concerns over inflation rising above 5% over the coming months. However, discussions on the subject will be ongoing and it is perfectly conceivable that the BoE will embark on further QE at some point this year.
The Pound initially fell sharply following the minutes and the unemployment data, but rose significantly through the course of the day, as risk sentiment continued to play a big part. Sterling peaked at 1.6570 against the U.S Dollar, the highest level in 14-weeks, while the UK currency also rose above 1.14 versus the Euro.
Euro / US Dollar exchange rates
The Euro initially dropped sharply yesterday to lows below 1.4350 against the U.S Dollar, as the single currency was undermined by losses on the Swiss Franc. The Euro regained ground strongly and pushed to a high just above 1.45, as the Dollar weakened following the revival in risk appetite, which reduced the appeal of the Dollar as a safe haven.
The headline Euro-zone inflation rate was confirmed at 2.5%, but there was a significantly weaker-than-expected for the core rate, which fell to 1.2%. Weaker inflation and slowing growth will increase pressure for the European Central Bank to switch to an easier monetary policy and cut interest rates from 1.5%.
Signs of slower inflation will also tend to have some impact in lowering bond yields and the ECB was continuing to discourage short-selling in peripheral bonds. Underlying confidence in the Euro-zone economy will remain fragile, especially with no agreement on the issuance of Eurobonds. There was also some evidence of tensions in the banking sector, as a unnamed bank tapped the ECB 7-day emergency liquidity facility for the first time since February.
Today’s Exchange Rate Data
U.K 09:30 – Retail Sales (July)
U.S 13:30 – Initial Jobless Claims (w/e 13th August)
U.S 13:30 – Consumer Price Index (July)
U.S 13:30 – Real Earnings (July)
U.S 15:00 – Existing Home Sales (July)
U.S 15:00 – Leading Indicators (July)
U.S 15:00 – Philly Fed Business Survey (August)