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Unemployment Level Suggests UK Is Ready For Rate Hike

Published 16/10/2015, 13:20
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Although hopes of a rate hike from the Bank of England before Christmas were mostly thrown out the window weeks ago the Pound did retain a steady stream of buy orders yesterday, deriding from Wednesday’s upbeat British unemployment report. The latest UK labour data showed that the jobless rate sunk to a new seven-year low of 5.4% in August, which confirms that, apart from the weak prospects for inflation, the UK economy is ready for higher interest rates. Wage growth rose to 3.0% and the employment rate ticked higher to an all-time high of 73.6%. It was not enough to rejuvenate 2015 BoE rate hike bets but it was enough to prevent traders pushing their 2016 projections further down the line and this stoked demand for Sterling.

Euro

The Pound to Euro exchange rate strengthened by over a cent yesterday as markets reacted negatively to comments from European Central Bank policymaker Ewald Nowotny suggesting that more stimulus was needed to support the flagging Eurozone economy.

Nowotny stated that the ECB was ‘clearly missing’ its target and posited that it was ‘obvious [that] additional sets of instruments [were] necessary’. Markets had already anticipated a move from the ECB to loosen policy further and these expectations were bolstered by Nowotny’s dovish remarks.

The easiest thing for the central bank to do would be to extend its €60 billion a month asset purchasing scheme past the current end date of September next year but there has also been talk of liberalising the target in order to incorporate more risky assets in order to help boost liquidity in harder-to-reach areas of the Eurozone economy.

It is unclear how much of a downward impact further QE would have on the Euro at this stage but the suggestion of looser policy is always liable to weaken a currency.

GBP/USD

The ‘Greenback’ initially rallied against the Pound yesterday afternoon as US data showed that underlying price pressures inched towards the Federal Reserve’s 2.0% target in September.

American consumer price index data signalled that stripping out volatile food and energy prices inflation rose from 1.8% to 1.9% last month. This gave the US Dollar a bit of a boost as markets considered the implications of the result on Fed rate hike bets. However, with the headline CPI still at 0.0% and wage growth languishing at 2.2% the verdict was clear: investors only see a one-in-four chance of a rate rise from the US central bank in 2015. The US Dollar was dealt another blow later in the afternoon when the Philadelphia Fed index printed at -4.5 compared to forecasts of -2.0.

Canadian Dollar

Despite a -2.1% decline in Canadian existing home sales and a slight downturn in crude oil prices the Canadian Dollar managed to sneak a half-cent gain against the Pound yesterday.

Crude, Canada’s most lucrative export and a clear driver of demand for the ‘Loonie’, fell to a two-week low as US oil stockpiles increased by 7.6 million barrels, which was seen to signal that supply continues to outstrip demand.

Australian Dollar

The Pound to Australian Dollar exchange rate fluctuated a lot yesterday without really getting anywhere.

The ‘Aussie’ got off to a poor start when employment data showed that 5,100 jobs were lost in Australia during September but the Antipodean currency did not suffer any heavy losses because the jobless rate remained at 6.2%. During the afternoon the risk-correlated ‘Aussie’ begun to rise as traders continued to eye a prolonged period of ultra-low interest rates in the US.

New Zealand Dollar

Sterling depreciated by around two cents against the New Zealand Dollar yesterday as Fed rate hike bets receded, boosting the appeal of the risk-sensitive ‘Kiwi’.

GBP/NZD fluctuated by around 70 pips during the Asian session last night as New Zealand consumer prices printed at 0.4% for the third quarter.

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