Wednesday, 17 October 2012

Pound at 4 month low vs Euro despite good UK data

Wednesday 17th October 2012
Good afternoon. It has been an interesting day for exchange rates, as we saw some much better UK data which helped lift Sterling against many currencies, however against the Euro we saw rates fall to a 4 month low due to a stronger Euro. This afternoon I’ll take a quick look at the data that has been released and the effect it has had on exchange rates.

Better UK Data lifts Sterling, but not against the Euro

The Pound made some gains this morning after some surprisingly good data was released. Firstly we had the latest jobless data. Unemployment fell by 50,000 to 2.53m in the three months to August, taking the jobless rate down to 7.9% from 8.1%.

A combination of more jobs being created and more people entering the workforce pushed the absolute number of people in employment to 29.6 million, the highest since these records began in 1971. The percentage of people in work rose to 71.3%, the best rate since April 2009. 

This was welcome news for the UK economy and surprised most analysts. The better outlook for employment in the UK raised the possibility that the economy may have staged a reasonable recovery in the third quarter after three consecutive quarters of contraction. The first estimate of third quarter gross domestic product is due next week and that will help us understand more.

The news gave Sterling a boost against most currencies, including the US Dollar that recovered back close to the $1.62 mark.

Despite the good data, Pound/Euro rates falls to 4 month low. 

Sterling fell to a 4 month low against the euro this morning after Moody's affirmed Spain's credit rating yesterday evening. The fact that they will keep their credit rating gave the Euro a boost, and coupled with the optimism surrounding the single currency after months of doubt, we saw the Euro gain significant strength.

This caused the GBP/EUR rate to fall, and despite the better UK jobs data, there was no significant recovery and the mid-market rate remains just above €1.23.

Bank of England minutes 

The latest BoE minutes were also released this morning. These showed policymakers were split on the need to buy more British government debt under their quantitative easing programme. Most economists had been expecting the central bank to opt for more QE in November. Although they voted 9-0 earlier this month for no more QE, the fact that the actual policy discussion showed that there is indecision amongst the MPC members means it’s not now clear if and when more QE will be announced.

It was widely expected more would follow in November, but now this is not as clear cut. With better jobs data, the market will await the GDP figures to determine the likelihood of more QE. If they do opt for more stimulus, Sterling could come under pressure as it is usually negative for the pound as it increases the supply of the currency.  

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