British Pound Advances as U.K. Jobless Claims Slip 6.3K, Euro Holding Steady Ahead of FOMC

Talking Points
•    Japanese Yen: Regains Footing Against Commodity Currencies
•    Pound: U.K. Jobless Claims Unexpectedly Falls 6.3K
•    Euro: Core CPI Slips to 1.0%
•    US Dollar: Consumer Prices, FOMC Rate Decision on Tap

British Pound Advances as U.K. Jobless Claims Slip 6.3K, Euro Holding Steady Ahead of FOMC

The British Pound retraced the previous day’s decline and rose to a high of 1.6360 on Wednesday following an unexpected drop in U.K. unemployment, and the GBP/USD may continue to hold a narrow range ahead the Federal Open Market Committee interest rate decision at 19:15 GMT as investors weigh the outlook for future policy. At the same time, Bank of England board member David Miles held a cautious outlook for the region and continued to see “very substantial” slack in the domestic economy, but went onto say that the central bank’s asset purchase program has helped to mitigate the risks of undershooting the 2% target for inflation as policy makers take unprecedented steps to steer the nation out of recession.

Claims of unemployment benefits in the U.K. unexpectedly slipped 6.3K in November after rising a revised 5.9K in the previous month to mark the first decline since February 2008, while the claimant count rate held steady at 5.0% for the third month following the downward revision in the October reading. Meanwhile, the International Labor Organization’s jobless rate increased to 7.9% during the three-months through October from 7.8% in the month prior, and conditions are likely to improve going into the following year as the expansion in monetary and fiscal policy continues to feed through the real economy. Moreover, average earnings including bonuses increased 1.5% during the same period after growing 1.2% in the three-months through September, while the gauge excluding bonuses slipped to 1.7% from 1.8% in the previous month, and households may keep a lid on spending throughout the first half of the following year as they face fading demands for employment paired with the slump in wage growth. 

The Euro tipped higher against the greenback, but held within the previous day’s range throughout the overnight trade as the EUR/USD stalled at a high of 1.4570, and the pair may continue to retrace the advance from earlier this year as policy makers hold a dovish outlook for inflation. European Central Bank member Ewald Nowotny reiterated that there is no “strong need” to normalize policy during the first half of 2010, and does not see any “major threats for price stability in the near future” as the central bank expects a moderate recovery going into the following year. Moreover, Mr. Nowotny argued that the marked appreciation in the exchange rate “is bearable,” but went onto say that the strength in the single-currency “would have a negative effect on the export performance of the euro area” and could hamper the prospects for a sustainable recovery. Meanwhile, consumer prices in the Euro-Zone increased 0.1% in November after expanding 0.2% in the previous month, while the annualized rate grew 0.5% from the previous year after falling a revised 0.1% in October. In addition, the core rate of inflation unexpectedly slipped to an annual pace of 1.0% from 1.2% in the previous month, and the slump in price growth is likely to lead the ECB to hold a neutral policy stance going into the following year as the central bank maintains its one and only mandate to ensure price stability.

U.S. dollar price action was mixed across the board, with the USD/JPY holding relatively flat from the previous day, and the major currencies are likely to hold a narrow range going into the U.S. trade as investors wait for the FOMC interest rate decision due out later today. The Fed is widely expected to maintain its current policy in December as the central bank aims to encourage a sustainable recovery, and Chairman Ben Bernanke is likely to hold an improved outlook for future growth as the world’s largest economy emerges from the worst recession since the Great Depression. However, Mr. Bernanke is likely to hold a dovish outlook for inflation and may maintain his pledge to keep borrowing costs at the record-low for an extended period of time as policy makers continue to see a risk for a protracted recovery. Nevertheless, consumer prices in the U.S. are forecasted to rise 0.4% in November after growing 0.3% in the previous month, while the headline reading for inflation is expected to increase 1.8% from the previous year after contracting 0.2% in October. At the same time, housing starts are projected to rise at an annualized pace of 574K during the same period, while building permits are anticipated to rise to 570K from 552K in the previous month, and the data is likely to encourage an improved outlook for the region as the economy returns to growth.


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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com