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Daily FX Update – 19th May 2017

A mixed bag of UK employment data left GBP at a crossroads midweek as the rate of unemployment fell to its lowest level since 1975 at 4.6% agaisnt an expected 4.7%. Average earnings however slipped to 2.1%. With inflation at 2.8%, we return to the most important and potentially damaging aspect of negative real wage growth. With inflation expected to climb to 3%, it’s not good for growth prospects and the Bank of England will have to juggle climbing inflation against slow growth and an economy that may not be able to support rising interest rates. In short, more people are earning less. That however, didn’t stop a spike in retail sales with the month on month figure doubling expectations, printing 2.0% with warm weather being attributed for the move. Sustainability in any data release is key, and future reads will be interesting considering the trajectory of wages and inflation. 

The Pound was also handed another favour in the form of an ever increasing tone of lack of confidence in Trump and impeachment talks being thrown around amid leaks to Russia and talks of cover ups. With that and the better than expected retail sales print, the Pound (and pretty much everything else) managed to pounce on the Dollar and we saw a breach of 1.3000 in Cable until late in to the US session. 

We’re still playing politics. This is a dangerous game and the US is a good example of where half decent macroeconomic data releases are being ignored. A better than expected initial jobless claims was largely ignored, as has most economic data out of the US of late. Whilst we saw a good opportunity for Dollar buyers yesterday, we saw an equally as quick reversal, it actually took 12 seconds for the Pound to drop that 100 pip gain (chart below.) The case for hedging in my opinion has rarely been stronger. 

Meanwhile, EU Inflation came in at expectation at 0.4%. The single currency has had a good week, pushing through the 1.1100 handle against the Dollar and strengthening agaisnt the Pound on the back of Merkel and Macron success stories in the two largest EU economies, perhaps alleviating concerns that Populism will continue to prevail.  

The data calendar is light today and would likely been ignored anyway so attention will remain on which way the Dollar pendulum will shift following the last couple of days. 

Have a great weekend. 

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