This morning the Office for National Statistics made the unappealing announcement that UK unemployment rose for the first time in six months last month. 35k additional people became unemployed putting the total number above 2.5m for the first time since May.
On the back of that release sterling has fallen sharply against the euro today: three days ago the GBPEUR exchange rate was nearing 1.20 but this afternoon it has tumbled to 1.17.
This perhaps demonstrates what economic commentators have been saying for some months: that market optimism toward sterling has been dependent on a string of solid economic releases, and could sour the moment things begin to look worse in the UK.
The Real Test
Of course the real test for sterling will come next year when the Coalition Government’s program of cuts come into effect. These are expected to generate even higher unemployment figures (especially in the public sector) and could exacerbate negative feeling toward sterling if the economy doesn’t react positively.
The US for example has decided that combating the deficit is secondary to cutting unemployment and generating economic growth. Hence it has initiated a program of economic stimulus including tax cuts for the near future. This puts the UK (and much of Europe where nations such as Portugal and Ireland are pursuing austerity programs) at odds with the US approach.
by Peter Lavelle with foreign currency exchange specialist Pure FX.
