‘Eurozone unemployment unexpectedly falls to 10-year low’. The reading came in at 7.9%, its lowest level in over a decade, and below forecasts of 8.1% as employment situation improves in Spain and Italy. (Reuters)
Yesterday saw the release of yet more upbeat Eurozone economic data with notably better-than-expected improvement in the unemployment situation. Although there’s little change in the economic powerhouses of France and Germany, new job creation in high unemployment regions such as Italy and Spain proved sufficient to drive the jobless rate across the currency bloc below 8.0% for the first time since 2008. This adds further weight to the European Central Bank’s (ECB) commitment to tightening monetary policy and increases the prospect that central bank President Mario Draghi may yet get to increase interest rates before his tenure comes to an end. It’s important to bear in mind that the Eurozone data is still showing some areas of weakness, but compared to the dovish signals from the Federal Reserve and with the Pound’s fortunes beleaguered by Brexit, the near-term theme for the common currency could be one of further appreciation.
The scene in Westminster may remain one of disarray over Brexit as next week’s parliamentary vote looms. However, Bank of England (BoE) Governor, Mark Carney, evidently succeeded in placating markets during yesterday’s online question and answer session. Although there was no silver bullet, he clearly believes that even with interest rates at depressed levels, the central bank has the ability to manage inflation regardless of what happens after March 29th. This was sufficient to provide at least some limited support for Sterling, notably against the Dollar, which is struggling against fresh dovish signals from the Federal Reserve.
There’s no shortage of debate as to how the Federal Reserve needs to act in its approach to monetary policy, but the key message which has emerged of late is one of patience. Given the current economic situation, there’s no reason for the US Central Bank to rush into making the next rate hike. This message was laid out clearly by the President of the Atlanta Fed in a talk on the economic outlook yesterday and reiterated in the release of the latest Federal Open Markets Committee (FOMC) meeting minutes, which were published last night. Not all members may be so restrained in their approach, but the minutes included signs of reluctance amongst some of the voting panel over the quarter point rate hike seen just before Christmas. The lack of inflationary pressure is being seen as a key driver here.
Dovish signals from the Federal Reserve yesterday were sufficient to push the Pound out to fresh highs for 2019 against the Dollar, but gains were capped by data indicating conservative spending amongst consumers in the latter part of 2018. The British Retail Consortium data highlighted like-for-like sales in December as down 0.7% against an expected decline of 0.3%, while data from Barclaycard also released overnight again painted a picture of restrained buying. Consumers had been cutting back on essentials in a bid to balance the costs of the festive season.
The combination of a dovish Federal Reserve and upbeat Eurozone economic data has driven the Euro to fresh highs for the year against the Dollar. Today sees the publication of the latest ECB meeting minutes which may provide some fresh indication as to the prospects of a rate hike being seen at the end of the summer. Such a move is still a long way from being ‘nailed on’, not least because the European Parliament faces a potential significant realignment in May’s elections, but clues here could help consolidate recent Euro gains.
Brexit continues to dominate the agenda for Sterling, with pressure still mounting on Theresa May over the government’s handling of the situation, including from her own Conservative party MPs. The improving economic outlook from the Eurozone is, therefore, serving to push the Pound lower against the common currency, and with both the UK and Eurozone looking at a data light session ahead, this theme could be maintained.