U.K. Unemployment Rate Falls to 7.4%

Judging from recent US macro-economic releases, the Fed seems to be in a tight spot over whether or not to trim bond purchases and the latest inflation numbers has done little to calm the nerves. Under the prevailing circumstances it remains to be seen if the outgoing Fed chief decides to pull the trigger on his QE3 measures initiated more than a year ago or hand over the baton to the next Fed President. At home, even as the BoE continues to present a united front on policy, sustained recovery in the labour market over the past few months will surely cheer policymakers. In the Euro zone, upbeat investor and business sentiment continue to contradict other dismal economic data, including the latest inflation print.

Pound Sterling – UK Markets

The release of the domestic labour market report has further substantiated the notion that the UK economic recovery is gaining strength. While the unemployment rate dropped to 7.4%, the number of people claiming jobless benefits in the UK also continued to decline, albeit at a slower pace. Consequently, Sterling has soared higher against the majors, ahead of the FOMC meeting outcome later today. Additionally, the just out minutes of the latest BoE meeting has revealed that policymakers voted unanimously on policy stance, while cautioning that further appreciation in Sterling may threaten the UK economic recovery. Yesterday, the Pound slipped below the 1.63 level against the greenback after data showed that the UK inflation rate hit a four-year low for November, thereby easing pressure on the BoE and damping investor sentiment towards Sterling. Furthermore, Mark Carney, in his speech to the House of Lords economics affairs committee reiterated that sustained domestic economic recovery will be needed before the BoE raises borrowing costs. However, the Pound’s losses remained capped after the release of near unchanged US inflation numbers and uncertainty surrounding the Fed policy decision.

US Dollar – US Markets

The US Dollar fluctuated against the common currency yesterday as investors remained on the sidelines, even as the Fed began its monetary policy meeting, its last, under the chairmanship of Ben Bernanke, to deliberate on the fate of the massive bond buying programme. Yesterday’s subdued consumer price inflation print for November pointed towards continued downward pressure on consumer prices in the world’s largest economy and will likely play on the minds of policymakers, despite upbeat labour market and retail sales reports lately. Market volatility is expected to remain high in the session ahead with investors glued to the outcome of the FOMC meeting and the subsequent press conference by Ben Bernanke. Any tightening in the policy stance by the Fed is expected to support the US Dollar against its peers in the sessions ahead. The greenback continues to remain under pressure against the majors in today’s trading session. Apart from the crucial Fed policy meeting, the much delayed US housing starts report for three-months beginning September will be released today and is expected to show an uptick.

Euro – European Markets

The single currency has nudged lower against the greenback this morning, despite the just out German Ifo business sentiment report showed further improvement in confidence among businesses in the Euro zone’s largest economy. The upbeat print has come on the heels of a separate report by the ZEW yesterday showing that investor confidence in Germany and the Euro zone surged to multi-year highs for December, with economists indicating that the prolonged recession in the Euro zone is bottoming out. However, weak inflation continues to hold back the currency bloc’s march towards a rapid and sustained economic recovery, despite the ECB’s ultra loose monetary policy in place. Yesterday, a mixed bag of German and Euro zone macro data together with lacklustre US inflation print and speculation about the status of the Fed’s asset purchase programme kept the Euro fairly supported against the greenback. With the FOMC meeting expected to generate maximum market interest today, the Euro zone construction output report is likely to be swept under the carpet by investors in the session ahead.

Other Currencies – Highlights

The New Zealand Dollar is trading on a weaker footing against the majors this morning following the release of mixed economic reports earlier in the day. While business confidence rose to its highest level in nearly 15 years for December, offering additional fillip to the economic recovery, the nation’s current account deficit widened the most since 2008 in the third quarter, primarily due to seasonal factors. Additionally, investors remain cautious ahead of the outcome of the Fed’s final policy meeting of the year today, with uncertainty surrounding QE3 scaling down. On the domestic front, tonight’s third quarter GDP report, which is expected to reveal upbeat growth numbers, will be keenly followed by investors in the Kiwi Dollar. Additionally, the slew of crucial economic news flows emanating from both sides of the Atlantic during the rest of the week will prove crucial for the Kiwi Dollar against the majors.