Thursday, 16 December 2010

Pound falls to 3 week low vs Euro; high unemployment

16th December 2010
Good morning. For the 4th day in a row, Sterling fell further against most major currencies. The culprit this time was high unemployment figures for the UK. This is despite figures showing retail sales rose at their fastest pace in 8 years. Rates at 08:30am this morning are as follows:
  • GBP/EUR 1.1776
  • GBP/USD 1.5599
  • GBP/AUD 1.5778
  • GBP/NZD 2.1151
  • GBP/CAD 1.5666
  • GBP/CHF 1.5132
  • GBP/ZAR 10.656
  • GBP/JPY 131.11
  • GBP/HUF 322.90
  • EUR/USD 1.3242

Poor employment figures push Sterling lower

Unemployment in the UK increased by 35,000 in the three months to October to 2.5 million, the Office for National Statistics (ONS) has said. It is the first time that the jobless measure has risen for six months.

The surprise increase was driven by public sector job losses, and pushed the unemployment rate up to 7.9%. The worse than expected figures pushed the pound lower, and we are now at 3 week lows versus the Euro.

Dilemma for Bank of England

The data could also heighten the policy dilemma for the Bank of England, coming only a day after figures showed consumer price inflation had risen to 3.3%, well above the Bank's 2% target.

In recent meetings, the Bank's monetary policy committee has been split three ways, with one member voting in favour of gradual interest rate rises to head off inflation, while another has voted to increase the Bank's purchases of government bonds in order to boost the recovery.

Usually, high inflation means a hike in interest rates which would support the pound. In the current climate though, the BoE have already said they expect inflation to remain above target through most of 2011. For this reason we don't expect a hike any time soon.

The split in consensus among the rate setters though is interpreted as uncertainty by the markets. With some members voting for rate rises and some not, the lack of a clear plan reflects the problems surrounding the economic climate at the moment.

Today's Data

From the UK the main data is Retail Sales figures at 09:30am. The report is widely followed as an indicator of consumer spending, and therefore is seen as a reflection of the economy as a whole. From the EU we have inflation measures in the form of the Consumer Price Index. The US releases jobless data at lunchtime.

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