Real Wages Fall, But Employment Rises
Sterling was in for a bumpy ride today, hitting an eight-month low against the Euro earlier in the morning, on news that Ben Broadbent, the Deputy Governor of the Bank of England (BoE), isn’t ready yet to vote in favour of an interest rate hike yet. The Pound’s tumbling stopped when the Office for National Statistics (ONS) published data which showed that Britain’s unemployment rate fell to levels not seen since the summer of 1975. However, data showed that UK wages, in real terms, are continuing to fall at the fastest pace in three years.
In the US, all eyes are on Janet Yellen’s testimony in front of Congress. Investors and traders will be searching for clues, which will indicate when the Fed is planning to begin unwinding its $4.5bn bond portfolio. Fed’s Governor, Lael Brainard, said that the Fed may be near its limit in terms of rate hikes for this year.
Pound Sterling – UK Markets
Today, Sterling retained its value against the US Dollar, trading at $1.28. The Pound gained a bit of ground against the Euro with the exchange rate set at €1.12. It was a real rollercoaster for the British currency’s value since it hit an eight-month low against the Euro and a two-week low against the US Dollar, before it managed to reverse its course downwards on the back of positive unemployment data.
The ONS published data which showed that in the three months to May, Britain’s unemployment rate fell to 4.5% compared to the 4.6% recorded a month ago. The 4.5% reading is a new superb 42-year low, considering the economic uncertainty that Brexit has created. Thirty-two million people are currently working in Britain, with the number rising by 175,000 during the last quarter. Unfortunately for workers, the ONS report showed that average weekly earnings in nominal terms increased by 1.8%, including bonuses, in the second quarter of 2017. With inflation in the UK jumping to 2.9% in May, the numbers confirmed that real earnings are declining in real terms.
Earlier in the morning, the British Pound tumbled against the Euro and the US Dollar when an interview with Ben Broadbent, the BoE’s Deputy Governor, was published. In the interview, Broadbent said that “it’s a bit tricky at the moment to make a decision to raise interest rates. I am not ready to do it yet.” Broadbent joins the camp of the Monetary Policy Committee (MPC) members, who are reluctant to raise borrowing costs in August’s MPC meeting.
US Dollar – US Markets
The US Dollar rallied against the Euro, with the exchange rate set at €0.87. Today, attention is shifted to Janet Yellen’s testimony in front of Congress.
The US Federal Reserve’s Chair will comment on the state of the US economy. The Bank of America Merrill Lynch’s (BAML) analysts published a brief preview on key things to look for in Yellen’s testimony. The analysts suggest that Yellen is not going to provide any additional details about the Fed’s balance sheet policy. They also predict that Yellen will likely reiterate her comments on inflation, saying that the recent weakness is due to special factors, which will not affect the underlying inflation pressures building up.
Fed’s Governor, Lael Brainard, delivered a key note speech in New York, during which she said that the Federal Reserve will act soon to begin unwinding its $4.5bn bond portfolio as long as the country’s economy cooperates. However, Brainard appeared rather cautious when asked about further interest rate hikes, saying that the Fed may not have much more to do on that front. Brainard is considered Janet Yellen’s ideological ally. According to a Politico report, President Trump won’t nominate Yellen for a second term next year.
Euro – European Markets
The Euro slumped against the US Dollar, trading at $1.14. Eurostat released data regarding the Eurozone’s industrial production, which surpassed expectations.
The Eurozone’s industrial production in May, on a year to year basis, increased by 4%, compared to the expected 3.6%. On a monthly basis, the industrial production of the Eurozone, in May, increased by 1.3% versus the expected 1.1%. The figures seem to confirm that the Eurozone’s economy is back on the path of growth.
The Eurozone’s finance ministers called for the Eurozone countries with high growth to increase their spending. The call was directed primarily at Germany, whose economy is growing together with its trade surplus. The Eurozone’s finance ministers are trying to persuade Germany to increase its public spending, thinking that this will help strengthen the bloc’s economy. Jeroen Dijsselbloem, the head of the Eurogroup, said that it would help the Eurozone economy, if the countries with big economic growth “would allow for an expansion of the demand side, in other words increase wages or lower taxes.”
Other Currencies – Highlights
Sterling remained stable against the Australian Dollar, trading at 1.68 AUD. According to published data, the Westpac Melbourne Institute Index of Consumer Sentiment rose by 0.4% in July to 96.6, compared to 96.2 in June. The Index has printed below 100 for the eighth consecutive month, which indicates that pessimists outnumber the optimistic consumers. Westpac’s researchers noted that the latest developments around interest rates could have been more damaging for confidence.
The Pound retained its value against the New Zealand Dollar, trading at 1.77 NZD. The Kiwi recovered its losses during the night, after falling yesterday because of released data showing weak retail spending on credit cards. According to a survey by Tufts University, New Zealand has been ranked as one of the world’s top digital economies. The country’s digital economy is seen as a positive combination of infrastructure, incubating start-ups, a commitment to innovation and government support.
Sterling rallied against the Canadian Dollar, trading at 1.66 CAD. The Bank of Canada (BOC) is expected to announce today its decision on whether it will hike its benchmark interest rate by 0.25% or not. Although markets seem to have already priced in the hike, Goldman Sachs analysts suggest that the BOC will deliver the rate hike in October.