The pound continues on the upside

The pound climbed to a 4 month high against the US dollar and a 9 month high against the New Zealand dollar yesterday on the back of better than expected UK employment data.

The Office for National Statistics (ONS) reported yesterday that UK unemployment fell slightly in May with the claimant count dropping by 8,600 versus forecasts of a 6,500 drop. The unemployment rate remains unchanged at 7.8% for the three months ending in April.

Analysts commented that “The headline numbers of this month’s labour market release reiterate a positive message with unemployment falling slightly and employment increasing. In addition, earnings growth firmed up against expectations of further weakening. However, a couple of less upbeat messages emerge when looking deeper into the data. Firstly, the pace of increases in employment remains significantly lower than what we saw last year. Taken together with the weakness in productivity of UK firms, this suggests that there is limited scope for the headline unemployment rate to experience a fall similar to that seen last year. Secondly, the improvement in earnings growth was driven by bonus pay and core average weekly earnings growth remains close to record lows. As prices continue to increase faster than earnings by some margin still, the already prolonged period of negative real pay growth seems set to continue and is likely to remain a hurdle to further improvements in consumer demand.”

The pound was little changed against the euro after the German constitutional court continued its hearing on the legality of the European Central Bank's (ECB) Outright Monetary Transactions (OMT) program which potentially allows it to buy unlimited amounts sovereign debt. The president of the judicial committee Andreas Vosskuhle noted that the conditions required to request the financial assistance might provide a positive middle ground to keep the ECB from over-exceeding its powers as the granting of financial assistance is subject to the adoption of an economic adjustment plan that must be approved by the euro zone.

Meanwhile, the US dollar moved lower against all the other major currencies yesterday as it continues to suffer from the market’s reaction to the possibility that the US Federal Reserve might start to taper back its stimulus plan later this year. This week has also seen the Bank of Japan keeping its own program on hold.

Overnight, the Reserve Bank of New Zealand kept its interest rate unchanged at its record low rate of 2.5% and signalled that it intends keeping rates at that level for the rest of the year.