The Pound declines against the majors as average hourly earning fall by more than forecast


By on June 14th, 2007.
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The renewed optimism for the Pound was severely tested yesterday as the UK currency fell 0.2% against the Dollar and a further 0.1% versus the Euro as a report on the labour market showed that wage growth remained subdued in the first quarter of the year. The annual growth rate of UK average hourly earnings fell to a 15-month low of 3.3% in April from 3.5% in February and suggests that pay growth is unlikely to fuel the already moderating inflationary concerns. Nevertheless, it seems that the focus of the Bank of England has shifted to other upside inflation risks as recent comments from the chairman of the Bank of England, Mervyn King, increased the possibility of a further rate hike this year. In addition, a separate gauge of the report showed that UK unemployment fell to the lowest level in over 18-months in May as the pace of economic expansion encourages companies to step-up hiring. From a technical perspective, the Pound may continue to decline against the Euro as a reversal back under 1.4800 could be seen as a ‘failed breakout’, leading to further downside movement back towards the support levels at 1.4700 and 1.4625. However, the focus this morning will fall on the UK retail sales report given that recent survey evidence have indicated that higher interest rates are beginning to impact on consumer demand.

The Euro continued to decline against the Dollar yesterday, falling a further 0.1% by the close of trading last night to the lowest level in 11-weeks following the a sparse supply of European economic data. The single currency may receive a timely boost this morning as the ECB monthly bulletin is expected to mirror the tone of the recent press conference and signal that the Central Bank may continue raising interest rates to ensure that risks to price stability do not materialize. Elsewhere, a separate report on the preliminary estimate of consumer prices is expected to show that inflation remained unchanged at an annual rate of 1.9% in May.

The Dollar continued to gather momentum yesterday, rising against both the Euro and the Pound as data revealed a sharp jump in U.S retail sales, which rose by the most in a year in May. The report has eased concerns that record fuel prices combined with falling home values would damage consumer sentiment, which has been pivotal in supporting economic growth this year. Sales increased almost double initial forecasts to 1.4% in May and reached the highest level in 17-months as robust growth in the labour market combined with rising wage growth helped cushion the blow from the significant jump in fuel costs. The report provides an indication that growth in the retail sector would continue to place upward pressure on the already elevated U.S bond yields and increase expectations that the Federal Reserve would raise interest rates towards the fourth quarter or the beginning of 2008. As a result, the Dollar rose for the sixth consecutive day against the Euro and peaked at the highest level in 11-weeks before trading off towards the close last night.

Data Released 14th June

UK 09:30 Retail Sales (May)

EU 09:00 ECB Monthly Bulletin

EU 10:00 HICP (May)

U.S 13:30 Producer Price Index (May)

U.S 13:30 Initial Jobless Claims (w/e 9th June)

written by Adam Solomon

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