Sterling received a boost after an upbeat UK employment report that showed the jobless rate unexpectedly fell to 5.5% in the three months to July, compared to 5.6% in the three months to June. Average weekly earnings rose by 2.9% in the three months to July, compared to a year ago, rising at their fastest pace in six years. Today’s data suggests that the economic recovery in the UK is picking up pace. This may put pressure on the Bank of England to start raising rates sooner.
After the data was released the pound rallied and reached a session high of 1.5459, up from a pre-data low of 1.5329.
The euro weakened after disappointing Eurozone CPI to reach a session low of 1.1213 before bouncing back up to 1.1296. The final reading for both the headline and core CPI were revised down by 0.1%. This brought down the headline number to 0.1% y/y versus the preliminary reading of 0.2%. The core was down to 0.9% y/y versus the prior reading of 1.0%.
The soft Eurozone inflation data will strengthen expectations for more quantitative easing by the European Central Bank. The current QE program is set to end in September 2016 but ECB President Mario Draghi and other policy makers have recently suggested that the central bank was willing and able to extended or even expand the QE program if necessary. ECB Vice-President Vitor Constancio, who sounded downbeat about the Eurozone’s economic outlook in an interview this morning, reiterated that QE could be increased if necessary.
The euro’s recovery in the US session came as a result of a broadly weaker dollar following disappointing US inflation data, which raises the odds that the Federal Reserve will not hike rates after concluding its policy meeting on Thursday.
The consumer price index (CPI) for August came in as expected at 0.2% y/y for the headline number, and was the same as July’s number. Regarding the core measure (which strips out fuel and food costs), the number came in at 1.8%, versus an expected 1.9% y/y but matched the prior month’s year-over-year gain. Low energy costs and a strong dollar are keeping inflation muted. This is something the Fed would have to take into consideration when making its decision on whether to raise interest rates at its meeting which started today and concludes tomorrow.
The dollar fell against most major counterparts after the CPI data, helping the euro rebound. Against the yen, the dollar slid to a low of 120.37, after reaching an earlier high of 120.41 yen.