UK unemployment drops – GBP leaps

I mentioned yesterday that this could be a good week for the pound and the first significant date of the week I started to prove that statement right. The UK unemployment rate drops to 3.8% in January. That’s comfortably below the market forecast of 4.0%. It is making traders question whether the Bank of England can bring forward the first of their interest rate cuts and the potential for an extended period of higher yields as made the pound very popular this morning. A quick round-robin shows the pound has gained half a cent against the US dollar (currently $1.2652), a third of a cent against the Euro (€1.1750), nearly a cent against the Aussie dollar (AUD 1.9405), just over a cent against the Kiwi dollar (NZD 2.0715) and half a cent against the Canadian dollar (CAD 1.7020). Weakness in the Japanese yen has seen the GBP/JPY rate hit its highest level since August 2015 at JPY 189.20. The next test for sterling comes tomorrow morning with the release of both consumer price inflation and producer price indices. The markets are expecting the headline level of consumer inflation to have pipped up to 4.2% in January. If so, any argument that the Bank of England should start cutting interest rates sooner rather than later starts to ebb away. Further sterling strength is likely to ensue.

USD weaker ahead of forecast inflation drop

US consumer price inflation data will hit the Newswires just after lunch in the UK. The market consensus is that we will see the headline rate of inflation slip to 2.9%. If so, it is getting very close to the US Federal Reserve’s target of 2.0% and traders and commentators will start to expect the discussion within the Open Market Committee meetings to turn to the thorny subject of interest rate cuts. From previous comments, we know that the Fed Chairman, Jerome Powell, is reticent when it comes to cutting the cost of borrowing unless he can see a sustained period of low inflation. However, there comes a point at which the higher cost of borrowing is doing more economic damage than the inflation rate. The real trick is knowing when to pull the trigger on a reversal of the high-interest rate policies. Right now, the GBP/USD rate is up to $1.2650 after strong UK data. However, The US dollar is holding its own against the euro. EUR/USD is steady at $1.0765; near the middle of its recent range.