Foreign Exchange News
20 February 2014

US Fed To Relax Unemployment Targets

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EUR/USD 1.3700
GBP/USD 1.6653
GBP/EUR 1.2155 (0.8228)
EUR/CHF 1.2196
GBP/CHF 1.4826
GBP/AUD 1.8544

Already out this morning are further signs of the diverging paths the various Eurozone economies are currently experiencing. This was evident in the differences between the two major economic powerhouses for the region. Both the Services and Manufacturing PMI’s for Germany posted expansionary figures for the month of February with each showing readings of 55.4 and 54.7 respectively, both above 50 which marks the line between expansion and contraction. In contrast, France’s respective figures showed readings of 46.9 and 48.5. Later this morning, the Eurozone composite average is expected to show radians for the region as a whole also above the 50+ mark at 51.9 and 54.0.

So far these figures have had limited impact on currency markets as traders digest last night’s release of the minutes from the US Fed’s last FOMC meeting. As we have mentioned already this week, Chairman Yellen has taking over the reins at a potentially more difficult time than her predecessor as economic data so far in 2014 has disappointed to the downside. This was highlighted by yesterday’s US housing data which showed Housing Starts in the U.S. slumped in January by the most in almost three years. As has been the case so far, the weather has been attributed as the main cause for this lower reading and many of the other disappointing data releases.

In response the key highlight from last night’s Fed minutes seems to show that policy makers are backing away from their year-old commitment to consider raising interest rates when unemployment falls below 6.5 percent. Whilst the joblessness has been falling faster than expected, there are weaknesses within the job sector that continues to worry the Fed. The number of new jobs being created is well below medium term targets and the falling unemployment rate appears to be a case of arithmetic with the labour market participation rate, the denominator in the equation being the driver behind the fall. New job creation has always been a better indicator of the health of the US economy. Despite this potential change in policy, the minutes didn’t really shed any new light and the Fed’s attitude towards tapering, so as a result USD was little changed overnight.

As we highlighted yesterday, sterling was recently hit after a greater fall in inflation than previously predicted. A double whammy for BOE appeared yesterday with the UK unemployment rate unexpectedly reversing recent gains by rising back to 7.2%. Post Tuesday’s inflation report, sterling had been under some selling pressure and looked at one point yesterday to be facing further pressures, but remarkably shrugged off the poor employment reading with many economists taking a medium term optimistic view that the trend in employment has been positive and that yesterday was only a slight blip. Certainly sterling continues to be well supported.

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