Following on from last week, the Pound plunged to the lowest level in over a week versus the Euro and briefly traded under the 1.9500 level against the Dollar before the release of the U.S non-farm payrolls in report on Friday.
As the Bank of England elected to keep UK interest rates unchanged at 5.0% this month, the European Central Bank indicated that rising inflationary pressures may warrant an increase in rates as early as July.
Nevertheless, the BoE can’t afford to reduce borrowing costs in the near term despite recent reports that house prices fell by the most in 15-years in May as tighter lending conditions and weakening consumer confidence increased the probability of a U.S led recession.
The Pound took advantage of broad Dollar weakness on Friday and rallied as high as 1.9700 by the close following the contraction in the latest U.S employment report. However, the Pound will struggle to consolidate of this unexpected upside move as the focus this week switches to the RICs house price balance, which is expected to reflect the further decline in UK home values.
Elsewhere, industrial production is forecasted to slow and the recent increase in job cuts is expected to show an increase in claims for unemployment benefits.
Nevertheless, the Pound may find some support on Monday as a separate report from the office on National Statistics is expected to confirm that UK producer price inflation accelerated to 2.7% year-on-year in May.
The recent revival in the Euro continued last week as the single currency broke through 1.2500 level versus the Pound and looks poised to test the resistance around 1.5800 versus the Dollar following the hawkish commentary from ECB President, Jean-Claude Trichet, last week.
The tone and language used in the Central Bank’s accompanying statement confirmed that policy makers were solely fixed on the upside risks to inflation and may even implement a rate hike in June, increasing the interest rate differential between Euro and the U.S.
In terms of economic data, the Euro shrugged off an unexpected decline in German manufacturing as output dropped 0.8% in April and indicated that growth in the economy may be slowing as a strong Euro and dwindling consumer confidence weigh on domestic demand.
Oil prices increased to a near record high on Friday, stoking the already elevated inflationary concerns as the rising cost of raw material is forcing manufacturers to pass on higher prices to the consumer.
The ECB’s governing council members are clearly less concerned with the declining outlook for growth and are instead more attuned with the imminent threat of inflation. That sentiment was echoed in a statement from ECB policy maker, Axel Weber, who said that financial markets had correctly interpreted the ECB’s message on Thursday as speculation over a July rate hike intensifies.
The Dollar fell by the most versus the Euro since early April and also suffered a sharp intraday decline against the Pound after the monthly U.S job report showed that unemployment reached the highest level in twenty years.
The volatility surrounding the release of the Non-farm payrolls report also led to a significant drop in U.S stocks despite the headline number falling less than initial forecasts.
Payrolls contracted by 49,000 in May and more significantly for the fifth month on a row while a separate gauge of the report plunged to the lowest level since 2003. The sustained increase in the number of jobless claims combined with the influx of students into the labour market for the Summer Break saw the unemployment rate jump by half a percentage point to 5.5% from April to record the biggest monthly increase since 1986.
The Dollar plummeted against the majors on Friday but the U.S currency may find some support on Monday as a report from the Commerce Department is expected to confirm that retail sales probably rose in May.
Data Released 9th June
U.K 09:30 Producer Price Index (May)
– Input
– Output
U.S 15:00 Pending Home Sales (April)
written by Adam Solomon
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- The Dollar advances against the majors as U.S retail sales unexpectedly jumps 1.0% in November
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- The Euro advances as German Business Confidence jumps to a 15-year high
- The Euro declines against the Pound after Euro-zone unemployment rises for the first time since November 2003
- UK Consumer Sentiment continues to show signs of growth despite high unemployment and rising energy costs
