Weekly Market Analysis - UK Economic figures drive GBP to gains against most currency pairings, whilst the eurozone takes a more dovish tone following the World Bank and IMF meetings last weekend.

GBP
The UK unemployment rate dropped to a five-year low of 6.9% on Wednesday
which reinforced positive Manufacturing data from a week earlier. GBP/USD rose
to the highest level since 2009 in what is a clear sign of economic confidence
developing in the UK economy. This has put more pressure on the Bank of
England at their next meeting to at least discuss an interest rate rise. However,
there is not a distinct timeline for a rate increase at the moment, as the Bank of
England altered their forward guidance framework last fall to look more broadly
at economic indicators before committing to a more definite timeline. Next week,
the major events on the economic calendar are the MPC Asset Purchase Facility
Votes and MPC Official Bank Rate Votes on Wednesday, followed by the Retail
Sales m/m figures on Friday.

EUR
Mario Draghi stated in New York this last weekend after the IMF and World
Bank meetings that further strengthening of the euro would require additional
ECB intervention because of the low level of inflation in the eurozone. The
international community has overwhelmingly expressed their concern to Draghi
about the low rate of growth in the eurozone and that measures need to be
taken to boost economic growth in the region. Any instability or sign of an
economic decline in the eurozone would have negative ramifications for global
markets because of the eurozone’s central role within the global economy.
Mario Draghi has stated that if further action is taken, it will be an interest rate
cut which precedes further quantitative easing. Draghi is due to speak at a
conference in Amsterdam on Thursday and may provide more clues as to the
further action that the ECB has planned.

USD
The dollar’s performance was weakened over the last week largely thanks
to Janet Yellen making a distinction about the likelihood of an interest rate
rise. During a speech last week, the Federal Reserve chairwoman included
in her comments that there will be a ‘considerable time’ between the end
of Quantitative Easing and the first interest rate rise. This undermined her
comments from the Federal Reserve meeting on March 19th where she said that
an interest rate rise may follow as early as six months after the end of the QE
Programme. The more dovish tone from Yellen has given the Federal Reserve
more breathing room as the Fed continues to voice their concerns about the
sluggish economic recovery, rather than the need for a higher interest rate.

End of Week forecast –

GBP/EUR – 1.2250

GBP/USD – 1.6890

EUR/USD – 1.3770

GBP/AUD – 1.7900

Nicholas Ebisch
Corporate Account Manager
Caxton FX

Chinese economic growth slows, UK unemployment rate falls to a five-year low

Chinese GDP q/y figures beat estimates, but have continued to slow from where they were a year ago. Global equity markets are up on the day because the 7.4% q/y growth out of China beat analysts’ estimates. Forecasters estimated that the Chinese economic data would come in at around 7.3%, as the economy has slowed from a year earlier, but a surprise to the upside is a welcome relief for global markets concerned about the slowing growth of China. Industrial production ytd/y and Fixed Asset Investment ytd/y slowed, but retail sales y/y accelerated in the past year. China’s current GDP growth is very high when compared to most countries in the world, but it pales in comparison to the double-digit GDP growth that it enjoyed for years. Analysts and planners maintain that the world’s most populous country needs to sustain high levels of growth because of the high number of migrant workers and young population entering the job market. This puts pressure on Beijing to strategically invest in more government stimulus to stop the slide of GDP growth.

In the United Kingdom, the unemployment rate fell to 6.9% during the last month. This is the lowest the unemployment rate has been since April 2009. The UK economy continues to surprise on the upside, as the economy looks to be doing very well and ticking back to life. Sterling received a boost against most major currencies this morning when the data was released. The Bank of England announced last year that the threshold for considering an interest rate increase would be 7.0%, however they are unlikely to rush into any definite timeline. As the unemployment rate fell more quickly than expected last autumn, the Bank of England modified their forward-guidance strategy, saying that they will now consider a broader range of economic indicators to assess the overall strength of the economy when deciding whether or not to raise interest rates. Although this does step up the pressure on the Bank of England, it is unlikely that this alone will advance the timeline for an interest rate increase.

Nicholas Ebisch

Corporate Account Manager

Caxton FX

What does the UK unemployment rate mean for monetary policy?

UK data delivered another surprise and according to the Office for National Statistics, the unemployment rate has dropped further to 7.1% from 7.4% bringing the 7% threshold given in forward guidance into question. With the unemployment rate now marginally above the benchmark, the need for the Bank of England to reassess the direction of interest rates is nearing.

Despite the labour market improving significantly faster than expected, the latest MPC meeting minutes suggest a rate increase is still unlikely to occur in the near future. The central bank sees no immediate need to raise interest rates, and with the inflation rate now on target there is even more room to maintain loose monetary policy. Of course the surprise drop in the unemployment will encourage the central bank to reconsider their view on the future for monetary policy, but the BoE will be cautious not raise rates prematurely.

This suggests that a re-evaluation of policy will rather result in an alteration in the central bank’s forward guidance, possibly a reduction in the unemployment benchmark to 6.5%, when the next quarterly Inflation Report is released on Feb 12. The market seems more excited about the fact that this unexpected result has brought the BoE closer to at least considering tightening policy, even if execution is not for a while yet. For now, this has been enough to keep demand for sterling rife.

Sasha Nugent

Currency Analyst

Caxton FX