Labour data in the shade of upcoming Brexit talks

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15 June 2017

Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

Yesterday’s labour market data showed the unemployment rate stable, at a multi-decade low of 4.6%. However, there were less encouraging signs from the British labour market, primarily a slowdown in the pace of wage growth. The average earnings growth in April slowed down to 2.1% YoY, disappointing given the consensus expectations of 2.4%.

arnings are growing at the slowest pace since mid-2016. Putting this in the context of recent inflation data, British workers are effectively losing purchasing power.

Sterling reaction to the data was relatively muted. It seems that investors are currently more concerned about the prospects of the deal between The Conservatives and DUP, and the potential impact the deal would have on the Brexit negotiations, which are set to begin next week. Today also brings the BoE’s decision. Considering last week’s inflation print, showing significant pickup in prices, investors will be focused on the prospects for tightening of monetary policy. The BoE has to walk a close line between rising inflation and increased uncertainty after the general election.

Federal Reserve raises rates, Yellen hawkish about the labour market

Today’s data from the US discouraged investors and accelerated the selling pressure on the US Dollar just a few hours before the FED meeting. Consumer Price Index showed a slowdown in May decreasing from 2.2% to 1.9% YoY. Consensus expected a drop, tough less severe. What’s more: inflation wasn’t the main disappointment. Retail sales in May showed a monthly drop of 0.3%. However, it needs to be noted that it is a highly volatile measure that needs to be viewed in context.

Alter London close, the Federal Reserve raised overnight rates to 1.25% as universally expected. It sounded an optimistic tone on the US economy, and appears to believe the first-quarter slowdown is behind us now. More importantly, the “dots-plot” displaying future expectations of rates from each FOMC member is still consistent with another hike in 2017, as it has been for some time.

Both the Fed action and its communications were entirely consistent with market expectations. Chair Yellen, however, sounded a hawkish note in the press conference. She referred to the “very strong” labour market and appeared unconcerned by recent weakness in inflation, ascribing it to some one-off price reductions. These statements, together with the increasingly stretched market bets on further Euro appreciation, buoyed the Dollar and the Euro gave up most of its gains from earlier in the day.

Euro soars on weak US Inflation

Eurozone Industrial production in April increased in line with expectations. The index rose by 1.4% on a yearly basis, but a downward revision to March numbers took some shine off the numbers. Also worth noting that energy production, which is not a good indicator of the state of demand, accounted for about half the increase.

Markets looked past this news as the Euro soared against the Dollar on the back of Greenbacks’ weakness, following a poor set of data from the American economy.