Wednesday, May 20, 2020

British Pound Gains Despite Disappointing Labour Data

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What’s happening: The British pound gained versus its major rivals on Tuesday despite a steep rise in UK’s jobless claims.

What happened: The labour market in the UK is reeling under pressure from the covid-19 pandemic, which was reflected in a record monthly rise in people filing for unemployment benefits in April.

On the other hand, risk-related currencies, like the sterling, are benefitting from news of encouraging early trial results from a coronavirus vaccine candidate. While an improvement in the risk appetite of investors resulted in a relief rally, gains made by the British pound were limited.

Why it matters: The Office for National Statistics reported on Tuesday that jobless claims in the country had surged by a record 856,000 in April to a total of 2.1 million, reaching its highest level since 1996.

Despite this, the unemployment rate declined to 3.9% for the first quarter, from 4% in the previous three-month period. The downturn in the unemployment rate was seen since the quarter accounted for just one week of the shutdown imposed by the government to curb the spread of the coronavirus pandemic. Labour productivity in the UK also dropped 1.1% in the first quarter, versus a 0.3% rise in the prior period.

Gains recorded by the sterling, which has declined close to 3% against the US dollar in May, are unlikely to stick. UK’s economic data going ahead will reflect the impact of the pandemic, while news of the Bank of England considering a move to negative interest rates is also concerning. A member of the central bank’s Monetary Policy Committee said yesterday that a negative interest rates scenario has not been ruled out, with covid-19 continuing to pressure the economy.

The UK has surpassed Italy with more than 250,000 coronavirus cases and 35,420 related deaths.

The GBP/USD pair rose a little over 0.4% to $1.2251 on Tuesday, after hitting a session high of $1.22691. The EUR/GBP slipped by 0.1% to 0.8932 pence, while the GBP/JPY traded at ¥131.6880, representing a 0.6% rise in the previous session.

What to watch: Markets will be keeping a close eye on comments from the Bank of England on its plans for moving to negative interest rates. Investors await some economic reports from the country, which is likely to be the biggest influence on the pound’s performance in the upcoming sessions.

Annual inflation rate in the UK, which fell to 1.5% in March, is expected to decline further to 0.9% in April. Producer prices are likely to ease by 0.5% in April, after a 0.2% decline in March. Retail price inflation in the country is projected to fall to 1.6% in April, from 2.6% in March.

The Markets Today

     

European stocks will be in focus today, ahead of various economic reports scheduled for release later in the day.

Context: European stocks closed lower on Tuesday, after starting the week on a positive note, with investors assessing the path for an economic recovery after an easing in lockdown restrictions.

Details: After rising earlier in the session, the pan-European Stoxx 600 closed the trading day lower on Tuesday, down 0.6%. Auto stocks were the weakest performers in the session, while insurance-related shares provided some support to the markets.

The economic data reflected some hope of an economic recovery, as the Eurozone ZEW indicator of economic sentiment inched up 20.8 points to a reading of 46 in May. The German 30 index gained 0.15% after the country’s ZEW survey of economic sentiment also rose 22.8 points to 51.0 in May.

Meanwhile, the European Automobile Manufacturers Association reported a 76.3% decline in new EU car registrations for April.

In corporate news, shares of Imperial Brands plummeted more than 6% after the cigarette maker lowered its dividend after reporting a 9% decline in its adjusted operating profits for the first half of the year. Julius Baer’s stock gained 5% after the wealth manager reported an improvement in gross margins during the first four months of the year.

The FTSE 100 index fell 0.77%, while French 40 closed lower by 0.89% on Tuesday.

What to watch: Investors await a basket of economic reports from the Eurozone, including current account, inflation rate and consumer confidence data. The annual inflation is likely to ease to 0.4% in April, from 0.7% in the prior month. The consumer confidence indicator in the Eurozone is expected to drop to -24 in May, from a reading of -22.7 in April.

Investors continue to monitor coronavirus numbers, with the total cases exceeding 4,897,490 globally. Russia has confirmed more than 299,940 cases, while there are over 232,030 cases in Spain.

Other Markets: US indices closed lower on Tuesday, with the Dow, S&P 500 and Nasdaq 100 down by 1.59%, 1.05% and 0.54%, respectively.

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What else to watch today

     

Turkey’s consumer confidence, motor vehicles production and government debt, Italy’s current account, South Africa’s retail sales, Canada’s inflation rate and wholesale sales, Brazil’s federal tax revenues and business confidence, Argentina’s leading economic index and economic activity index as well as the US MBA mortgage applications, crude oil stocks change and FOMC minutes.