The pound faced some volatile trading in the European session, first declining against key rivals like the euro, Australian dollar, New Zealand dollar, Canadian dollar and Swiss franc as we had a slight move towards risk appetite, but that unwound quickly as the European trading session wore on and the pound managed to reclaim its losses against the higher-yielding currencies. While the back-and-forth risk sentiment was a major contributor to pound's swings today we had very important data coming out from the Bank of England as well as from the labor market.
BOE Inflation Report Sees Inflation Below 2% in 2 Years Times
From the Bank of England we had the quarterly Inflation Report and overall it pointed to a less confident central bank in regards to growth and inflation.
The prospects for the economy have worsened and incorporating the newest quantitative easing number (total of £375 billion), inflation is still more likely to be below than above the 2% target the bank said. As a result of this forecast the pound was weaker, and it points to the possibility of the Bank of England expanding its bond asset purchase program even further in order to further stimulate the economy.
The biggest risk to the economy, the bank judged, is the fallout from the European sovereign debt situation, especially if the resolution to the crisis is not forthcoming.
From Bloomberg: Implementation of a credible and effective policy response in the euro area would help to reduce uncertainty and so support U.K. growth, the Bank of England said. Its absence poses the single biggest risk to the domestic recovery.
The UK sees GDP at 3.1% in 2013 with a trough in May 2012 at which growth will be just 0.9% annual pace. Currently market participants cannot see of rate hike until 2014. GDP increased 0.5% quarterly terms and third-quarter, this followed a very weak 0.1% gain in growth in the second quarter, and the data coming into the fourth quarters already showing weakness. Manufacturing declined in October, and services growth cooled considerably.
Claimant Count Better Than Expected, but Overall Labor Data Dour
Also, as we saw in today's data the labor market remains pressured with the unemployment rate moving up to 8.3% through September, which is a 15-year high.
The number of unemployed rose by 129K in the 3rd quarter to 2.62 million, with the number of unemployed youth rising above 1 million.
If we look at number of Britons claiming unemployment benefits however - the claimant count - the figure for October was better-than-expected as 5.3K Britons claimed benefits. That was smaller than the 20.4K expected by economists but it was still the 8th month in a row of claims rising and the total number of claimants grew to 1.6 million. You can see the graph of that total number to the right.
Overall, the labor market portends a weak economic situation and with high unemployment will add pressure on UK domestic demand.