by Adam Solomon
Sterling / Euro and US Dollar
The Pound declined heavily against the US Dollar exchange rate yesterday but political deadlock in Europe saw the Euro unable to capitalize on a renewed bout of Sterling weakness. The UK currency traded down towards 1.6250 against the Dollar by midday, after reports showed that UK jobless claims surged by more-than-expected in May, while wage growth remained subdued.
Reports earlier this week showed that inflation remained at the highest level in over two years in May, while rising unemployment and slower wage growth will have a negative impact on consumer confidence and damage the outlook for the UK economy. Higher unemployment also reduces the prospect of an increase in UK interest rates this year with some investors pointing to the risk of a second quarter contraction.
Claims for jobless benefits rose 19,600 from April, after rising 16,900 the previous month but wage growth actually slowed to 2% in the three months through April. A separate gauge of the labour market showed that unemployment fell by 88,000 over the same period, the most since 2000. While there are mixed signals on the labour market, inflation is outpacing wage growth and squeezing consumer confidence, amid the most aggressive public spending cuts in a generation.
The conflicting economic data will do little to inspire confidence and the lacklustre pace of the economic recovery will continue to undermine confidence in the Pound. The UK currency extended its decline against the U.S Dollar yesterday and recorded further losses through the course of the day to a low of 1.6150.
In his mansion speech on Wednesday, the governor of the Bank of England Mervyn King maintained a generally downbeat assessment on the UK economic outlook and also referenced to very weak growth in money supply. There will be continuing expectations that the central bank will resist pressure to increase interest rates, as the committee as a whole believes that domestically-induced inflation remains limited.
The Pound remained vulnerable on yield grounds, although international trends dominated with wider Dollar gains pushing the rate lower. The UK banking sector will remain an important focus and there will be further concerns over renewed losses if EU governments cannot prevent debt defaults. However, for that reason the Pound continued to trend higher against the Euro, rising to a high of 1.1450 overnight.
The Pound had been supported earlier in the day by a separate report that showed UK consumer confidence surged by the most in over 5-years in May. An index of sentiment from the Nationwide Building Society gained 11 points from April. Investors have, however, scaled back expectations that the Bank of England will wait until May 2012 before lifting the benchmark lending rate above 0.5%.
The focus this morning will fall on the monthly retail sales figures for May and we are anticipating a significant drop from April’s result, which was inflated due to the additional bank holidays in April and the Royal Wedding. The Pound may come under further selling pressure against the Dollar, amid a revival in risk aversion, which has seen investors seek lower-yielding currencies as a hedge against risk.
Euro / US Dollar
The Euro dropped to a one month low against the U.S Dollar this morning, as the EU struggles to break the deadlock over a second Greek rescue package. The Dollar also benefited from data that showed the cost of living in the U.S rose by more-than-expected in May, reflecting higher price pressures in the economy and boosting optimism that the FOMC will have to raise interest rates to combat inflation.
The Euro exchange rate also came under pressure after the Greek Prime Minister lost political support and the European Union struggled to break a deadlock on a second financial rescue package for the struggling nation. The Euro lost ground against the vast majority of the 16 most actively traded currencies, as the uncertainty over European sovereign debt continues to undermine confidence.
Demand for currencies linked to growth also fell, amid reports that showed manufacturing in the U.S declined in May. The issue with Greece is unlikely to find a resolution in the immediate future and that will continue to hamper the Euro, but in the build up to the July rate announcement, the single currency may find some buying support with the ECB expected to raise interest rates to 1.25%.
EU 09:00 – ECB Monthly Bulletin Published
U.K 09:30 – Retail Sales (May)
EU 10:00 – Employment (Q1)
EU 10:00 – Final HICP (May)
U.S 13:30 – Current Account (Q1)
U.S 13:30 – Housing Starts (May)
U.S 13:30 – Initial Jobless Claims (w/e 11th June)
U.S 15:00 – Philly Fed Business Survey (June)