Headlines
UK wages rise more-than-expected
– Unemployment dips to new 6-yr low.
GBP/EUR hits fresh 7-yr high
– Greek debt deal still hanging in the balance.
GBP/USD at monthly high
– Sterling downtrend appears to have ended.
Cautious Fed minutes hurt US Dollar
– Boost risk sentiment.
Sterling
Upbeat British labour market data stoked Bank of England rate hike expectations and sent the Pound rocketing higher against the majors yesterday.
The latest jobs report showed that jobless claims fell by -38,600, job creation surged 103,000 and the headline unemployment rate tumbled to a new six-year low of 5.7%. But even more encouraging than the robust job creation figures was news that average UK earnings jumped from an upwardly revised 1.8% to 2.1% in the three months through December, giving a significant boost to Britons’ real wages and boosting hopes of an earlier-than-anticipated rise in UK interest rates.
Euro
Sterling rallied by around 1.3 cents to a new seven-year high against the Euro yesterday thanks to the better-than-expected UK labour market report. Speculative investors are now starting to consider that the Bank of England may actually be prompted to begin its rate hiking cycle before the year is out if underlying inflationary pressures continue to boost earnings and consumer spending. Yes, the non-core inflation rate is currently sitting at a all-time record low and looks set to decline further over the next few months, but this is largely thanks to the global slide in crude oil prices and not related to core domestic price pressures. If cheaper fuel costs continue to bolster the purchasing power of British consumers then robust economic growth could accelerate the bank’s plan to begin hiking interest rates at the start of 2016.
Across the pond in the Eurozone, debates rumbled on as to how the Hellenic nation would be able to secure an extension to its loan agreement with the EU. German officials are vociferously opposed to any deviation from the current plan, which incudes many harsh austerity measures that Greek PM Alexis Tsipras considers politically unpalatable. And Greek officials do not want to commit to a further six months of EU-imposed domestic rules and regulations. The political impasse looks set to continue for a little while longer, but leaders would be foolish to remain stubborn for too long because analysts suggest that Greece could hit bankruptcy as early as February 24th if the ECB pulls the plug – as it has threatened to do – on its emergency funding programme.
The political conflict ensures that ‘Grexit’ fears continue to weigh on demand for the single currency as we enter today’s session.
US Dollar
The Pound to US Dollar exchange rate rose by around a cent yesterday to strike a new monthly high in reaction to the upbeat UK labour data.
The majority of market participants now expect the UK benchmark interest rate to stand at 0.75% in 12 months time, with some traders even expecting a rate rise before the end of the year. This development in British rate hike bets is supporting Sterling against the US Dollar and looks to have killed off the steep downward trend that took the UK currency considerably lower in the second half of 2014.
GBP/USD held onto, and indeed built upon, its gains during the evening following a surprisingly cautious minutes report from the Federal Reserve. Fed Chairwoman Janet Yellen indicated that rates were likely to be raised in June, but mentioned that some policymakers were concerned with the recent turmoil in global growth prospects as well as the downturn in domestic inflation expectations. The ‘Greenback’ depreciated across the board in reaction to the announcement, which marked the first time in two years that the US central bank had explicitly referenced ‘international’ concerns with relation to the path of US interest rates.
Canadian Dollar
Sterling posted a 150 pip gain against the Canadian Dollar yesterday due to rising wages in Britain and globally dampened demand for oil.
The ‘Loonie’ had performed well at the beginning of the week in response to three days of consecutive gains for its most lucrative export, crude oil. However, demand for crude deteriorated yesterday and with it went investors’ appetite for the commodity-linked currency.
Australian Dollar
The Pound to Australian Dollar exchange rate strengthened by as much as two whole cents yesterday, thanks to the latest dose of expectations-beating jobs data to emerge from the UK, but GBP/AUD ceded around 100 pips during the evening in response to the Fed’s slightly dovish policy statement.
Although the US central bank does still look set to start its long-awaited hiking cycle around the midpoint of this year, the cautious remarks with regards to soft inflation and ‘international’ growth concerns were interpreted by some to mean that US rates could remain low for longer. The prospect of credit remaining cheap bolstered the appeal of the high-beta Australian Dollar.
New Zealand Dollar
The New Zealand Dollar followed a very similar pattern to its Antipodean counterpart, the ‘Aussie’ Dollar, yesterday; GBP/AUD rose by 200 pips in the morning and then bounced lower by around 115 pips during the New York session. The motivating factors were also the same: strong UK wage data boosted the Pound; cautious Fed comments boosted the risk-correlated ‘Kiwi’.
Data Released Today
EUR ECB Publishes Account of Monetary Policy Meeting
USD Initial Jobless Claims (FEB 14)
EUR Euro-Zone Consumer Confidence (FEB A)
USD Leading Indicators (JAN)