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UK labour data beats expectations, Dollar falls after Fed minutes

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17 August 2017

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The Pound remained stuck below the 1.29 level against the US Dollar on Wednesday, despite an impressive labour report out of the UK.

abour data out from ONS was broadly better-than-expected in the three months to June, providing a morsel of hope that the Bank of England could still raise interest rates before the end of the year. The unemployment rate was the standout, falling unexpectedly again to 4.4% from 4.5%, its lowest level since 1975. On an equally encouraging note, average earnings growth also came in above forecast. Average wages excluding bonuses increased to 2.1% versus the 2.0% eyed, while including bonuses also increased to 2.1% from an upwardly revised 1.9%.

While impressive, real earnings growth is still negative in the UK and at -0.5% is almost assured to have had some sort of negative impact on retail sales, data of which is due out at 9:30 UK time. Even another strong reading is unlikely to provide too much support for the Pound which seems to have found a range against the US Dollar amid a lack of major economic or policy news on either side of the Pacific.

Fed voice concern about weak US inflation

Ahead of yesterday evening’s Federal Reserve meeting minutes the US Dollar was broadly stronger with traders ignoring soft housing data in favour of a recovery in risk appetite. Building permits and housing starts were both underwhelming in the US in July, the latter of which falling to just 1.155M units from 1.2M.

However, the Fed provided little reason to buy the greenback after policymakers appeared increasingly concerned about weak inflation and would pause in their hiking cycle to determine if the slowdown in prices was transitory. While we think a December hike remains on the cards, we would likely need to see a rebound in inflation back towards the Fed’s 2% target. Dovish Federal Reserve rate setter Kaplan will be speaking in the US this afternoon, while industrial production numbers could also shift the currency.

Draghi unlikely to shift stance at Jackson Hole

The Euro had briefly dipped back below the 1.17 mark against the US Dollar prior to the release of the FOMC minutes on Wednesday after sources claimed that President of the European Central bank Mario Draghi would not use his Jackson Hole speech to announce any new policy changes. At the most recent ECB meeting, Draghi claimed that changes to the quantitative easing programme would be discussed “in the autumn”. This is likely to remain the case and the September meeting of the Governing Council remains the earlies we are likely to receive any hints that a tapering in the asset purchasing programme is on the way.

Earlier in the session, GDP numbers showed a modest upward revision with the Euro-area economy growing by 2.2% in the year to June versus the 2.1% estimate. Given the lag investors gave the data little attention. Revised Eurozone inflation numbers out this morning are expected to remain unrevised, although any positive or negative surprise could shift the single currency today. This afternoon’s meeting accounts from the European Central Bank will be the main focal point.

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