Rational FX: UK unemployment rate expected at stagnant 7.9% [16/02/2011]

Market Movers Yesterday

• CPI in the UK continued to rise and peaked at 4%. This would have no doubt encouraged Mervyn King to write a letter to the chancellor with an explanation. Regardless of the excuses we are expecting to hear over the next few days markets fear that inflation is out of control and the BoE will have no choice but to raise rates as soon as possible to counteract any further increase.

• The Euro was subdued by disappointing GDP figures. EMU GDP came out less than expected both YoY and MoM which materialised in the Euro trading above the 1.19 level against the pound and as low as 1.3459 against the US dollar.

• The Euro did however recover slightly, against the USD only, as the EUs trade balance for December came out in surplus.

• Greek and Spanish 10 year bonds attracted a lot of investors from Asia yesterday and after a long time saw their cost of borrowing decrease as market concerns drop and believe that the EU can manage the uncertainty in the 17 nation bloc.

• The USD failed to benefit from risk aversion mid day as US retail sales dropped alongside US Net TIC flows, which shows in and out flows of financial resources in the United States. This came out $25.4Bn below expectations. Despite such negative results traders felt that inflation in the UK was far more concerning and cable continued to trade in the mid 1.61s.

Market Movers Today

• From the UK we have already had the Nationwide consumer confidence out in the UK. Even though the result was slightly below expectation we saw no movements in the currency markets.

• UK unemployment rate is expected to paint a bleak picture with unemployment stagnant at 7.9%. We are still yet to see whether private sector employment has increased enough to counter the public sector job losses.

• The most crucial piece of economic data today will be the BoEs inflation report. Markets will be listening closely for indications of an interest rate hike followed by Mervyn Kings’ speech. This could prove to be very volatile for the single currency.

• We have PPI and Industrial production from the US. Both of which are expected to come out below estimates. Whether this will be enough for risk aversion to dominate the markets end of London trading is yet to be seen.

• The last piece of data from the US is the FOMC minutes. This will determine the appropriate stance of monetary policy and assesses the risks to its long-run goals of price stability and sustainable economic growth.