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The Pound Picks Direction From Disappointing U.K And U.S. Data

By DailyFX Research Team
15 June 2005 20:11 GMT
The pound stirred to life against the dollar early in the New York session after unsurprising labor data out of U.K made way for an indicator-laden U.S. schedule.

The U.K. provided little support for the pound’s surge against the dollar in the day’s trading.  All of the economic data from the country was of the employment variety.  Average earnings excluding bonuses and the unemployment rate tracked by International Labour Organization both remained unchanged in April at 4.1 percent and 4.7 percent respectively.  Bonuses must have risen slightly evidenced by the slight rise in average earnings including bonus to 4.6 percent in April from a revised 4.5 percent in the previous month.  The indicator with real market moving potential for the day was the change in jobless claims.  Jobless claims rose for a fourth month in May by 13,200 people.  The rise is the fourth consecutive monthly rise in claims, the longest stretch since the end of 1992.  Claim’s poor showing is another indication that the U.K.’s 51 quarters of expansion maybe coming to an end.  Other pieces of evidence to the claim are the cooling housing market, which has provided much of the support for the rise, and the slowed 0.5 percent pace in growth of the economy in the first quarter.  The Bank of England has already cut its 2005 forecast of growth from 2.7 to 2.6 percent.  

With little reason for a surge in the pound from the U.K.’s side, U.S. weakness provided ample reason to dump dollars in its favor.  The U.S. did not see all negative posts, but those that were negative overcame any optimism.  The two releases that showed signs of strength were industrial production and the Empire Manufacturing survey.  Industrial production rose 0.4 percent in May after contracting 0.3 percent the month before.  Production picked up, led by a 0.6 percent increase in factory work, as inventory production eased in the first quarter driving companies to boost production.  The Empire survey offered a pleasant surprise to dollar bulls after reporting a 22.8-point jump in the index from negative 11.1 in May to a positive 11.7 in June.  Any effect these indicators could have had on sentiment were quickly washed out as the consumer prices and the TIC data gave reason’s for doubt in the strength of the world’s largest economy.  Consumer prices fell for the first time in nearly a year by 0.1 percent in May.  Inflation has held a healthy clip over the past year as surging energy prices have kept resident’s heating bills and product prices rising, but prices have eased after peaking above $58 bbl on April 4.  With the once forerunning drive of inflation easing its intense run, producers don’t have to pass higher costs on to consumers.  The more dubious release for the day was April’s net foreign security purchases’ failure to meet expectations once again.  Foreigner’s purchases of U.S. securities accelerated slightly to $47.4 billion in April falling far short of the $70.0 billion forecast.  Despite the repeated shortfall, Fed Governor Donald Kohn said in a statement today that the Fed’s policy is still “accommodative” and inflation rates still require tightening.  

The British pound was quoted at 1.8229-34 against the dollar and 199.05-14 against the yen at 21:00 GMT.  

U.K. equities continued lower for the second day led by active utility and energy sectors.  The FTSE 100 fell 27.30, or 0.54 percent, to close at 5,019.50.  The FTSE 250 gave up 31.10 points to 7,258.70, to close 0.43 percent lower.

The energy sector paved the way for the markets descent after OPEC announced that it would boost daily oil output by 1.8 percent.  Shares of Europe’s largest oil producer, BP, erased 3 pence to 574.

Shares of Shell Transport and Trading Plc, 40 percent shareholder of oil giant Royal Dutch/Shell, eased 3.5 pence to 497.

The softening housing market led analysts to cut ratings on Britain’s largest homebuilder, Persimmon, to “reduce” from “add.”  Shares of the company fell 9.5 pence to 735.5.

Utilities also felt the effects of spiking oil prices.  Shares of Scottish And Southern Energy, the fourth biggest energy supplier, lost 30 pence to close at 971.

On analysts’ downgrades, shares of Kelda Group Plc plunged 24.5 pence to 665.  The countries third largest publicly traded water provider fell after an analyst cut shares from “buy” to “hold.”

Amongst the falling market, there were a few companies that posted gains.  The Islamic Bank of Britain Plc jumped 5.5 pence to 40.5 after the bank opened a new branch west of London.

Other raw material producers faired better on the exchanges, receiving a boost after industrial production in China exploded 16.6 percent in May.  Shares of BHP, the world’s largest miner, advanced 8.5 pence to 687.  Shares of Xstrata Plc, the largest exporter of plant-burned coal, grew 12 pence to 1,036.

Gilts rose on the day after the dip in fall in mortgage approvals and housing prices seems to have stabilized.  10-year Gilts plunged 0.59 to 102.97 with yields rising 7 basis points to 3.94   Long Gilt futures contracts for September delivery fell 0.58 to 112.32.

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15 June 2005 20:11 GMT