British Pound (GBP) Crushed by New Data
The latest labor reports from the UK show rising unemployment and the slowest rate of wage growth on record, a troubling combination that pushed the British pound (GBP) lower against major currency counterparts.
It was a seesaw night of action in the forex market, with EURUSD bouncing between 1.3150 and 1.3200 on contradictory flows, while GBPUSD was notably weaker after disappointing UK labor data showed rising unemployment.
UK unemployment increased to 7.9% from 7.8% expected even as claimant count showed some improvement by falling -7K despite expectations for no change. Overall, the number of people out of work in the UK rose 70,000 in the three months to February. This is the highest increase since the September- to-November period in 2011.
The true sour note in the data, however, was the very weak average earnings growth numbers, which printed at 0.8% versus 1.4% forecast. This was the slowest rate of wage growth since records began and suggests that UK workers are continuing to fall behind in their purchasing power as inflation remains well above 2.5%.
The higher inflation data is also keeping the Bank of England (BoE) on the sidelines as the monetary policy committee (MPC) remains divided on further quantitative easing (QE) measures. Today's BoE minutes revealed that UK monetary authorities remain split on additional stimulus measures with BoE Governor Mervyn King, and MPC members Miles and Fisher all voting to increase QE again, but the other six members rejecting the idea. The minutes also indicated that BoE expects growth to be subdued given the weakness in the Eurozone economy.
With no stimulus on the fiscal or monetary front, the UK economy looks moribund for now, and today's data was viewed negatively by the market, which sent GBPUSD through the 1.5300 level with shorts pressing the trade to test the support at 1.5250.
Having failed at the 1.5400 figure, cable now looks like it’s going to consolidate and may press lower as investor expectations for the UK economy are tempered. Given the weak rise in wages, it is very likely that UK retail sales may miss their mark as well, putting further downward pressure on growth in Q1 of this year.
Has the EUR/USD Rally Run Out of Steam?
Meanwhile, EURUSD traded like a ping pong ball for most of the night, first selling off towards the 1.3150 level on some very heavy futures-related sell programs in the DAX, but later rebounding to 1.3200 on spillover flows from EURGBP, which broke above 8600 to set fresh monthly highs. The EURUSD fell towards the 1.3150 level as risk-aversion flows ultimately took over.
The surprisingly strong price action in the EURUSD over the past several weeks has not been driven by any improvement in the fundamental picture, but rather by favorable movement in capital flows as Japanese and Chinese investors bought European bonds. Although the pair has rallied all the way to 1.3200 as result of this dynamic, the rally may have finally run out of steam and will need some positive economic news to push the pair higher.
See related: 3 Factors to Determine EUR/USD’s Next Move
USD/CAD May Test Long-Term Resistance
In North America today, the focus will be on the Canadian dollar (CAD), as the Bank of Canada (BoC) issues its monthly monetary policy statement. The USDCAD has risen back towards the 1.0250 level and may pop to test long-term resistance at 1.0350 if the BoC remains dovish and dour about Canada’s prospects for growth going forward.
By Boris Schlossberg of BK Asset Management
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.