Increasing unemployment and rising budget deficit frustrate Pound

04-22-2009 15:33

The Pound dropped almost 50 pips as a result of releases concerning the BoE minutes, budget data and UK unemployment. Economist expected jobless claims to rise by 116,000 but the data proved an increase of 73,700. Still, the unemployment rate went up to 6.7%; the highest level since 1997. The UK budget deficit rose to 90 billion pounds, in comparison with last year’s 34.6 billion, and increased the impact of the deteriorating labor market. The deficit will result in future tax raises after emerging from the present recession which reduces long-term growth outlooks for the UK. The GBP/ USD dropped from 1.4676 to 1.4525 before finding support.

BoE unanimous on quantitative easing and unchanged benchmark rate

The BoE’s minutes proved that they were unanimous concerning the additional quantitative easing actions and concerning the unchanged current benchmark rate of 0.50%. According to the central bank some credit availability is improving and the first asset purchase effects have been promising. The MPC stated that there are signs that the recession will weaken in the second quarter but risks remain to the downside. The central bank believes that it is still premature to determine if credit markets are recovering and underlines that inflation will undershoot its 2% target. For that reason the Pound could face difficulties in the short-term. However, upside potential could be possible if the Sterling continues to find support by the 100-Day SMA at 1.4525. The UK economy is expected to be the first to benefit from quantitative easing measures, which provides the Pound medium term bullish potential.

Central bank’s benchmark rate lower limit at 1.0%

At the opening of European trading the Euro dropped sharply due to comments by ECB member Axel Weber as the Euro reached an intraday low of 1.2894. According to the policy makers the lower limit of the central bank’s benchmark rate would be 1.0%, which indicates that the end of easing is near after the rate cute of 25 bps. The mixed signals by the committee have caused speculation that the central bank continues to be indecisive on future policy measures in spite of various statements by President Trichet that they remain unanimous.

Corporate earnings begin to weigh on risk sentiment

During overnight trading the Dollar continued to find support as concerns over corporate earnings begin to affect risk sentiment. A relief rally was the result of fear growing that the administration was unwilling to ask Congress for extra funds and could let under capitalized banks fail. Furthermore, Tim Geither’s comments could cause another day of volatility for the Dollar.