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Pound Drops On Jump In Unemployment, BoE Voted 9-0 To Cut Rates

Wednesday, 17 December 2008 10:21:55 GMT  |  John Rivera, Currency Analyst

The Pound would fall over 300 pips from its high of 1.5725 on a jump in unemployment. After breaking above the 1.5700 price level for the first time in over a month the Sterling weakened after the U.K. employment report showed a 75,700 rise in jobless claims, which was the largest increase since 1991.

Talking Points
• Japanese Yen: Rises To 13 Year High
• Pound: Labor Market Deteriorates
• Euro: EZ CPI Falls Most In Almost Two Decades
• US Dollar: CPI and FOMC Rate Decision On Tap

Pound Drops On Jump In Unemployment, BoE Voted 9-0 To Cut Rates Citing Declines In Manufacturing

The Pound would fall over 300 pips from its high of 1.5725 on a jump in unemployment. After breaking above the 1.5700 price level for the first time in over a month the Sterling weakened after the U.K. employment report showed a 75,700 rise in jobless claims, which was the largest increase since 1991. The unemployment rate would rise to 3.3% from 3.1% which was the highest since 2000. Meanwhile, the BoE minutes revealed that the central bank voted 9-0 to cut their benchmark rate by 100 bps at their last meeting.

A closer look at the minutes from the MPC revealed that policy makers had contemplated a larger cut but refrain due to fears that it would undermine confidence in the economy and lead to excessive weakness in the Pound. The panel cited the marked slowdown in manufacturing and expectations that growth will continue to contract into the first quarter of 20010 as reasons for the aggressive move. Since yesterday we have seen markets price in another 20 bps of easing from the BoE with expectations that at least another 60 bps is possible over the next twelve months. The lower interest rate expectations may lead to continued weakness in the Sterling which fell to a new record low against the Euro overnight. The EUR/GBP broke above the 0.9100 price level for the first time after another 150 point mover higher.

The Euro continued its unprecedented move against the dollar last night as it reached as high as 1.4195. A larger than expected cut from the Fred and hawkish comments from President Trichet underline the difference in philosophy between the central bank leaders. The current interest rate differential between the two may continue to be a supportive factor for the single currency. However, markets are still pricing in over a 138 bps of easing from the ECB and with inflation dropping near the central bank’s 2.0% target they won’t have any obstacles to prevent further easing. Indeed, Euro-zone consume prices fell to 2.1% from 3.2% in October which was the most in almost two decades. Energy costs slowing to 0.7% from 9.6% and housing falling to 4.5% from 5.9% were the main driver of easing inflation. If the regions economy continues to contract, ultimately President Trichet may have to put aside his fears that bringing interest rates too low will trap the central bank continue cutting rates, which could lead to Euro weakness in the medium term.

The Yen rose to the highest level in 13 years against the dollar following the aggressive rate cut by the FOMC despite a rally in equity markets. The continued strength of the currency may rekindle speculation that the BoJ could intervene in an attempt to weaken the currency. The country’s economy is dependent on exports which are made less competitive with the rising exchange rate. Therefore, we could see traders start to price in possible action from the central bank leading to a reverse of recent gains.

The dollar has started to fight back during the overnight sessions erasing some of its broad based losses following the FOMC’s 75 bps rate cut. The central bank lowered their benchmark rate to a record low and vowed to print as much money as necessary to unfreeze credit markets. The sharp fall in the dollar over the past few days could set it up for a retrace especially with a relatively empty economic calendar. However, expectations are that the MPC will eventually take rates top zero as the U.S. economy continues to show weakness with mounting job losses, industrial production halted and business and consumer continuing to retrench. Fundamentals have started to have a greater impact on dollar price action and given the bleak outlook we could see continued weakness. Conversely, dollar bulls will point to the weakness globally and the fact that the U.S. is ahead of the curve in initiates to promote growth.

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Related Articles:

Fed Cuts Rates by 75bps to a New Record Low
U.K. Jobless Claims Surge the Most Since 1991 as the Economy Sank Deeper Into Recession

To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com

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