The UK has enjoyed a stream of positive economic releases in the last fortnight. For instance last week industrial production figures were upbeat while yesterday the October CPI (Consumer Price Index) numbers indicated rising inflation. This is positive for sterling because it lessens the chance the Bank of England will introduce another bout of quantitative easing.
This morning though the stream of positive news has ended with the announcement that UK unemployment increased in the three months leading up to October. The Official for National Statistics has reported saying that the number of claimants increased by 35k pushing the total back above 2.5 million.
Economic commentators have been saying for some weeks that present optimism toward sterling is fragile. The UK economic recovery is far from secure and any bad news could buoy concerns that conditions will remain negative into 2011. Hence the release today could lead to sterling weakness.
In the US meanwhile the Fed decided yesterday to maintain interest rates at 0.00-0.25% without increasing its program of quantitative easing. Chairman Ben Bernanke commented that the US economic outlook looks more positive than a month ago: President Obama’s new tax cuts are likely to increase consumer spending. US unemployment though remains stubbornly high.
Furthermore sentiment toward the dollar soured yesterday because credit rating agency Moody’s warned that the US AAA rating could be downgraded in the coming year. This is because the US deficit is incredibly high at present with no official plans to combat this: in fact President Obama’s tax cuts mean extending the deficit further.
The credit ratings of Belgium and Spain also came under threat from Moody’s in EMU economic news yesterday. Like the US this is because these nations face stunningly high deficits, and might possibly request an ECB-IMF bailout in the next year.
However presently the markets are looking to the European Commission meeting on Friday for a permanent solution to the EMU crisis. Officials are expected to make the EFSF a permanent mechanism for rescuing indebted members, and this could assure the markets that nations such as Spain and Belgium are secure even if they eventually request financial support.
Coming up later today is the November CPI (Consumer Price Index) release from the US. This will indicate the rate of inflation in the US. However the Fed’s continuing program of quantitative easing means the release is unlikely to be significant.
by Peter Lavelle with foreign currency exchange specialist Pure FX.