It was a bad day for Sterling yesterday as a combination of bad employment data, and a pessimistic inflation forecast from the MPC combined to crash the Pound downwards. The Labour market showed not only an increase in the number of people claiming benefit, but an acceleration in the increase, with over half of the rise of 70,000 people claiming benefit this year appearing in the last two months. One piece of positive news out of the employment data was the absence of indications that wage pressures are rising; with recent inflation fuelled by rises in food and energy prices, the fear is that it will feed a wage/price spiral, but there are no signs of this yet.
Shortly after the labour data the MPC released their quarterly inflation report, this presented a dark view of the coming months/quarters for the UK, inflation is expected to peak at least at 5%, and economic growth is expected to be lower than previously forecast, with domestic demand described as broadly flat. The MPC don't rule out a technical recession in the UK, in fact the statement that there was 'bound to be a quarter or two' of economic contraction seems to imply it. Of course what really impacts Sterling in the short term is the outlook for interest rates, and the markets have interpreted the report as dovish, with the next move in interest rates being downwards, but the question is when; the CPI projection provided by the BoE, implied a constant level of interest rates at 5%, which seem to point to a bit of time before the MPC will be cutting rates, possibly by the 2nd quarter of 2009.
The markets took the pessimistic view from the BoE, and the poor labour report and ran with it, bringing Sterling drastically lower, down below 1.87 against the Dollar, a 3c drop to a level not seen since October 2006, and the Pound fell back down below 1.26 late yesterday and currently sits below 1.2550. Sterling's collapse against the Dollar could have been worse if the US currency had continued it's strong rally, however yesterday saw a pause in the rise of the Dollar, as a downgrading of many of the gold standard US banks dented confidence in financial stocks. Retail sales also failed to provide any extra impetus as they fell 0.1%mom, and as always seems to be the case when the Dollar falls, the price of oil rose, climbing back towards $115 per barrel.
The UK takes a breather after a tumultuous week, and the focus switches to the Eurozone and their latest revision to GDP. The general consensus is for a 0.2% drop, although with GDP revisions downwards to many of the component nations, including Germany and France, the risks are on the downside. The ECB have already factored a drop into their predictions, but if it does provide more than the expected drop then the Euro may start it's own dip, although the Eurozone looks to be withstanding the global slowdown better than the UK.