Headlines
UK unemployment holds at 5.7%
– Wage growth slows to 1.8%.
BoE policymakers concerned with Sterling strength
– Rate hikes could be delayed.
GBP/EUR sinks to 2-week low
– Pound down -150 pips.
Sterling up 200 pips against US Dollar
– Fed strikes cautious tone in policy statement.
Sterling
It was not a day to remember for the Pound on the currency markets yesterday: Sterling lost ground against virtually all of its major peers.
There were three main reasons for the plunge in demand for the UK tender:
1) The rate of British wage growth came in at 1.8% for the three months to January, which disappointed economists’ forecasts of 2.2% and marked a sizable slowdown on December’s score of 2.1%. However, the average earnings figure did still mark an increase in real wages of 1.5% because UK inflation is currently running at a record low of 0.3%.
2) The British unemployment rate remained at 5.7%, confounding expectations of a dip to a new six-and-a-half-year low of 5.6%.
3) The latest Bank of England minutes report showed that policymakers are concerned with the strength of the Pound against the Euro and suggested that any potential rate hikes over the next few years could be delayed until GBP/EUR weakens and inflation begins to rise back towards the 2.0% target.
The combination of the two worse-than-anticipated labour market figures and the slightly cautious BoE minutes meant that UK rate hike bets were pushed back and this softened demand for Sterling.
Euro
The Pound to Euro exchange rate stumbled to a fortnightly low yesterday in reaction to the disappointing UK jobs figures.
With hopes of a fresh multi-year low UK unemployment rate dashed and concerns over the outlook for British inflation weighing on BoE rate hike expectations the single currency was able to steal a rare day of gains against Sterling yesterday, rallying by around 150 pips to its highest level since the start of the month.
Some analysts predict that GBP/EUR will continue to soften over the next few weeks as Sterling retreats following its incredibly strong start to the year so far.
US Dollar
Sterling stormed ahead against the US Dollar yesterday in reaction to a surprisingly cautious statement from the Federal Reserve.
Markets had been primed for a statement of hawkish intent, which many thought would pave the way to a rate hike in June of this year. The debate before the announcement centred on whether the US central bank would maintain the use of the word ‘patient’ with regards to its rate hike outlook.
However, such debates proved futile because the Fed did omit the word ‘patient’ from its statement but the message was still interpreted as cautionary because policymakers stated that ‘further improvements in the labour market’ would be required to persuade the FOMC to start raising rates. This suggests that the recent run of bumper non-farm payroll reports is not considered sufficient progress to prompt the Fed’s first bout of monetary tightening.
GBP/USD rallied by over 200 pips to a 12-day high in reaction to the statement.
Canadian Dollar
The Pound succumbed to a near-two-month low against the Canadian Dollar yesterday as both US and UK rate hike expectations were downgraded. Sterling tumbled by around a cent when the UK wage data was released and failed to recover during the evening when the Fed statement hit newswires because markets saw the FOMC announcement as a precursor to a period of lower interest rates for longer.
Australian Dollar
The Australian Dollar strengthened by around 160 pips yesterday as investors punished the Pound for the underwhelming UK labour market report. The risk-sensitive ‘Aussie’ also garnered support following the Federal Reserve’s latest policy statement, which many saw as a sign that the first US rate hike would take place in September, or later, as opposed to previous estimates of June.
New Zealand Dollar
The Pound followed a downward trajectory against the New Zealand Dollar yesterday, shedding over two cents as sentiment towards Sterling was hit by weaker wage growth and demand for the ‘Kiwi’ was boosted by expectations of lower rates for longer in the US and a slightly better-than-forecast domestic growth report.
New Zealand GDP came in at 0.8% for the fourth quarter, beating expectations of 0.7%, and this brought the yearly figure higher from 3.2% to 3.5%.
Data Released Today
09:00 EUR ECB Publishes Economic Bulletin
12:30 USD Initial Jobless Claims (MAR 14)
14:00 USD Leading Indicators (FEB)