Pound Remains under Pressure

Yesterdays Trading
Sterling extended gains against the euro yesterday in early trading, hitting the day’s high after Bank of England policymaker Adam Posen said he expected the UK currency to trade higher against the euro in the medium term. His comments caused some short term strength for the pound.

Sterling however trimmed gains against most currencies alter in the day, including the Euro and the US Dollar after data showed that annual UK consumer price inflation fell below the Bank of England’s 2 percent target, suggesting that price risks continue to recede as the economy remains weak.

The Office for National Statistics said UK consumer prices rose 0.3 percent on the month in June, taking the annual rate to 1.8 percent, the lowest since September 2007, from 2.2 percent in May.

Today we have several data releases for the UK at 09:30am; Claimant Count, Average Earnings, Unemployment Rate & Jobless Claims. The unemployment rate will have the most impact, and we expect th figure to be 7.4%. Any more than this, expect the pound to weaken. Any less than this, and rates may climb slightly.

UK Jobs
On the subject of unemployment, a BBC survey yesterday showed that 2 thirds of people across the UK know someone personally who has lost a job in the recession.

But, while concerns about employment may be increasing, most people believe the worst may be over – despite believing the economic situation remains tough.

It is this confidence that caused the recent upsurge in Sterlings value, although official figures paint a different picture, which is why the pound remains where it is. Watch today’s data closely for any difference in the actual figures compared to estimates.

Eurozone
Figures yesterday showed that Eurozone industrial output rose in May compared with April, the first month-on-month increase since August last year. This caused some further strength in the Euro, and helped to knock rates down yesterday afternoon.

Factory production across the 16 nations that share the single currency rose 0.5% last month from April, but was still down 17% from May last year.

The data comes two weeks after official figures showed eurozone retail sales fell in May, while unemployment rose.

“May’s first rise in industrial production is obviously very welcome news, and reinforces belief that the eurozone economy contracted at a substantially reduced rate,” said Howard Archer, chief economist at IHS Global Insight. “Nevertheless, it needs to be put into perspective – production was still down by 17% year-on-year.”

As a result, Mr Archer said it was “premature at this stage” to say that industrial output would make a sustained recovery. So, as earlier in the year we have a tug of war between how badly the EU and UK economies are performing, and it is this back and forth thats causing the rate to bounce up and down. It’s impossible to predict who will win this tug in the short to medium term, and the most important thing to keep an eye on is official data releases. The markets are as unsure as the rest of us, and so any differential in actual figures is causing big swings in exchange rates.

At 10am this morning we have Consumer Price Index for the EU. This captures the changes in the price of goods and services. The CPI is a significant way to measure changes in purchasing trends and inflation in the Euro Zone, so watch these figures closely.

Todays Data
UK – Claimant Count
UK – Average Earnings
UK – Unemployment Rate
UK – Jobless Claims
EU – Consumer Price Index
US – Consumer Price Index
US – FOMC Minutes
US – Crude Oil Stocks

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