Pounds Weighed By Highest Unemployment Since 1997 and Increasing Budget Deficit

The pound fell nearly 50 pips after a slew of data hit the wires including U.K. unemployment, BoE minutes and the budget figures. The number of jobless claims rose by 73,700 which was less than the 116,000 that was forecasted by economists. However, the unemployment rate rose to 6.7% which was the highest since the labor party came into power in 1997.

[U][B]Talking Points[/B][/U][B]
• Japanese Yen: Back Below 98.00
• Pound: Rising Unemployment And Increasing Budget Deficit Fuel Growth Concerns
• Euro: Weber Sets 1% as Lower Limit For Refi-rate
• US Dollar: Geithner and Earnings Could Spark Volatility [/B]

[U]Pounds Weighed By Highest Unemployment Since 1997 and Increasing Budget Deficit[/U]

The pound fell nearly 50 pips after a slew of data hit the wires including U.K. unemployment, BoE minutes and the budget figures. The number of jobless claims rose by 73,700 which was less than the 116,000 that was forecasted by economists. However, the unemployment rate rose to 6.7% which was the highest since the labor party came into power in 1997. The impact from the deteriorating labor market was exacerbated by the U.K. budget deficit increasing to 90 billion pounds nearly tripling the 34.6 billion from a year earlier. The implications of the shortfall are future tax increases which Britions will have to deal with after emerging from the current crisis limiting long-term growth prospects for the country. The pound/dollar pair came under pressure before the releases falling from a high of 1.4676 to a low of 1.4525 before finding support.

The BoE also released the minutes from their last policy meeting which revealed that they were unanimous in voting to initiate quantitative easing measures and leave the benchmark rate at 0.50%. The central bank started that the initial asset purchase effects have been “encouraging” and that some credit availability is improving. The MPC would go on to say there are signs that the recession will moderate in the second quarter but risks remain to the downside. The central bank still maintains its expectations that inflation will undershoot its 2% target and that it is still too soon to say that credit markets are improving. Therefore, we may see sterling continue to trade heavy in the short-term but as long as it remains supported by the 100-Day SMA at 1.4525 there exists upside potential. Many expect that the U.K. economy will be the early beneficiary from quantitative easing measures which leaves medium term bullish potential for the currency.

The Euro has come off of its intraday low of 1.2894 erasing a sharp dip lower that was seen at the opening of European trading on remarks from ECB member Axel Weber. The policy maker stated 1.0% would be the lower limit of the central bank’s benchmark rate which signals that easing will end after the 25 bps cut which is expected sometime over the next two policy meetings. The mixed messages from the committee have lead to speculation that they remain divided on future policy actions despite continuous claims from President Trichet that they remain united. The euro/dollar upside potential may be limited by the 50-Day SMA at 1.3038, as the downside risk remain for the pair with future easing expected from the ECB and risk appetite limited by corporate earnings.

The dollar remained supported overnight as we start to see concerns over corporate earnings begin to weigh on risk sentiment. The theme is similar to what we saw yesterday before U.S. Treasury Secretary Timothy Geithner reassured markets that banks had enough capital and those that may have additional needs would be able to fulfill them from remaining TARP funds, private investment or converted government preference shares. This sparked a relief rally as fears had grown that the government was reluctant to ask Congress for additional funds and may let under capitalized banks fail. On the earnings front AT&T, Morgan Stanley, McDonalds, Wells Fargo and Apple after the bell highlight another heavy day of releases. Additionally, Tim Geither Is back in Washington for additional testimony which could lead to another day of volatility for the greenback.

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[I]To discuss this report contact John Rivera Currency Analyst[/I]: [email protected]