UK Unemployment Surpasses BoE Target

Yesterday provided what was perhaps an unexpectedly good day for Sterling with the release of Unemployment and Average earnings figures. With the recent dip in UK inflation falling to 1.6% the market was encouraged by Average Earnings exceeding inflation by 0.1% at 1.7%. Although consensus was 1.8% the fact that the gap is now in favour of earnings is a positive sign for both UK citizens and the UK economy. It means that the average price of a basket of household goods has come down, whilst average earnings have gone up – getting more for your money.

What will be seen as a bigger result for the UK economy yesterday was ILO Unemployment. The market knows that labour data is one of the most important fundamental indictors for the BOE to assess the current situation, and economic potential of the country. February unemployment came in at 6.9% vs the 7.2% which was expected. The question now is how the BOE will take this result. Mark Carney made it very clear that 7% was the target to start looking at interest rates, it is probably too early to take any action, however, it is most certainly a step in the right direction for the UK economy. On that positive data, Sterling pushed the Greenback to levels above 1.68 to a high of 1.6817 and firmly pressed the Euro 1.21’s, reaching a high of 1.2161 on the day.

The Eurozone released their inflation figures yesterday and with a mixed result, the market took to continuing the “bid tone” on EUR/USD. The pair remained pretty much unchanged after the release of March CPI as it showed that prices rose at an annual pace of 0.5% which came in, in line with expectations. The Core CPI reading - which is a measure of price movements by the comparison between the retail prices of a representative shopping basket of goods and services (excluding volatile components such as food, energy, alcohol and tobacco) – came in at 0.7%, a tad lower than the 0.8% forecasted.

A bounce back in April inflation figures (released next month) towards 0.9% (YoY) from March’s low of 0.5% is probably needed to prevent the ECB from taking action next month via an interest rate cut. EUR/USD barely broke a sweat on the inflation news and continued to trade in muted range bound patterns, settling at around 1.3830/50 before tailing off during the afternoon session following US industrial production.

A day of medium impact data yesterday saw it claw some of its recent losses against the Euro back. After a mixed bag of Eurozone inflation data propping the pair up, it took positive US Industrial Production to cut the Euro gains in half and close in on the 1.3812 pivot level. Positive Industrial Production – which shows the volume of production from factories and manufacturing in the US – came in above expectation at 0.7%. An uptrend is regarded as inflationary which may anticipate interest rates to rise, however, we will probably need to see more sustained growth in this area for that to happen just yet. US Building Permits and Housing Starts came in slightly off target but this didn’t do much to ruin the day for the Dollar after coming in short of expectation.

The focus point for the USD yesterday came from Fed Chair Janet Yellen’s speech. Her comments centred on inflation in which she stated that there is a bigger chance inflation will be under target than over, she see’s inflation gradually moving back towards the 2% marker and the FOMC state that the forces of low inflation are temporary. With regard to interest rates, they will remain lower if both employment and inflation figures miss the goals set by the FOMC. The USD was a shade firmer, however, the speech did not do anything to rock the boat.