Market News & Insights
19 February 2014

UK Unemployment in Focus Despite Removal of 7% Threshold

EUR/USD 1.3750
GBP/USD 1.6677
GBP/EUR 1.2122 (0.8247)
EUR/CHF 1.2221
GBP/CHF 1.4811
GBP/AUD 1.8475

The USD selling resumed yesterday as US markets returned from their holiday on Monday. Weaker than expected data once again keeping risk markets alight as expectations grow that the pace of tapering will be impacted by the recent poor weather in the states, which has seen the US economy severely impacted, based on data released over the first couple of months of the year. Stocks were missed with the Dow lower and the S&P higher. Overnight we saw a slight pullback in the Nikkei after Tuesday’s advance but other Asian equities posted gains.

The USD rebound was halted yesterday as the US returned to markets, Monday’s rally from 11 consecutive days of declines was short lived as data released yesterday again saw questions asked on the current pace of tapering. US NAHB housing market index fell to 46 from 56 in January, and the Empire Manufacturing survey declined to 4.48 from 9.0 in Jan. later today we have building permits and housing starts, expect them to follow the weak trend or data.

On their own they carry limited weight but combined with the steady stream of weak figures from the US we have seen increased calls for a halt to the taper. We see this as unlikely at this juncture and while we believe data is likely to remain weak for Jan and Feb, the Fed are likely to be patient and see the weather effect plays out, if their previous comments are to be believed. With that in mind we will look towards this evening’s FOMC minutes for further indications on their commitment to the current pace of taper.

GBP selling continued through much of the European session yesterday following weaker than expected CPI readings. Those looking for the BOE to increase interest rates sooner than mid 2015 guidance might suggest (although still somewhat ambiguous) would not have been happy to see the headline CPI inflation rate decline below the 2% target for the first time since November 2008, with the core reading falling to 1.6% from 1.9% in December. Jan inflation alone declined to -.6%, from .4% in December.

The pound will be back in the firing line again this morning as UK event risk headlines the European session this morning. Jobs data tops the risks with the headline unemployment expected to remain at 7.1%. Since the BOE have removed their 7% threshold and replaced it with “spare capacity” target a decline may only see a temporary lift in GBP, however any deterioration of jobs data will compound yesterday’s GBP selling post weak CPI reading.

The EUR calendar is light today and even a weaker ZEW reading yesterday failed to stop the single currency advancing. The sharp drop in German economic outlook, the first in 10 months, was not the only weak headline news for the region. EURUSD rose however to 7 week highs.