GBP/USD extends losses after UK jobless report, BoE minutes

The pound extended yesterdays losses to further distance from a 4-year high, after data revealed the UK unemployment rate unexpectedly rose in the three months through December, easing concerns BoE may raise interest rates sooner-than-projected.

GBP/USD hit a session low at 1.6637 at 12:24 GMT, after which consolidation followed at 1.6646, losing 0.23% for the day. On February 17th, GBP/USD touched 1.6823, the strongest level since November 2009. Support was likely to be found at February 13th low, 1.6600, while resistance was to be encountered at February 18th high, 1.6742.

The UK Office for National Statistics (ONS) reported today that the nation’s unemployment rate increased to 7.2%, from 7.1% in the three months through November. Analysts had expected the measure to remain steady at Novembers reading, which was also the lowest since May 2009.

“Sterling is lower after the unemployment rate ticked higher in December,” said Valentin Marinov, head of European Group-of-10 currency strategy at Citigroup Inc. in London, cited by Bloomberg. “We could see some temporary downside for sterling from here.”

A separate report by the ONS revealed the number of people filing for jobless benefits in the UK fell by 27 600 people in January, exceeding analysts’ expectations for a decline of 20 000. The government agency also revised up its initial estimates, saying jobless claims fell by 27 700 in December from a previously reported drop of 24 000.

According to BoE’s minutes from its February meeting, central banks policy makers voted unanimously to keep interest rates unchanged as they prepared for a new phase of forward guidance.

Yesterday, the UK annual inflation fell below Bank of England’s threshold for the first time since November 2009. The UK consumer prices rose 1.9% last month, compared to a year ago, short of analysts’ expectations for a 2% increase and after inflation fell to 2% in December, matching Bank of England’s threshold for the first time in four years.

On a monthly basis, consumer prices dropped 0.6% in January, while analysts projected a decline of 0.5% and after they increased 0.4% in the previous month.

Core CPI, which excludes the volatile food, energy, alcohol, and tobacco costs rose at an annualized rate of 1.6% in January, down from December’s gain of 1.7% and short of analysts’ projections for a 1.7% advance.

The decline in the UK inflation supported Bank of England’s stance, that there is still no imminent need to raise interest rates.

In its quarterly inflation report released on February 12, the central bank revised its forward guidance, replacing the 7% unemployment threshold with a range of economic indicators, including spare capacity.

BoE said the unemployment rate will probably fall below 7% in the first quarter of this year, but at the same time underscored there was “scope to absorb spare capacity further before raising bank rate” from the current record-low 0.5%. BoE estimated an output gap between 1% and 1.5% of UK gross domestic product.

The central bank also raised its forecast for the UK economic growth in 2014 to 3.4% from 2.8% projected in November and predicted the first increase of interest rates will come in April 2015. Bank of England projected inflation of 1.9% in the next three years, below the central bank target of 2%.

Meanwhile, the Federal Reserve is scheduled to release minutes of its January policy meeting later today as market players are looking for clues about the pace and the size of future stimulus cuts, after manufacturing activity in the state of New York trailed estimates and US factory production decreased by the most since May 2009.

“The dollar is being sold” said Yuki Sakasai, a currency strategist at Barclays Plc in New York, cited by Bloomberg. “We need to remain wary of the downside risks to U.S. data. Investors will be looking for Fed’s view on the economy.”

Janet Yellen, in her first testimony to Congress as head of the Fed, said on February 11, the central bank will “likely reduce the pace of asset purchases in further measured steps at future meetings”, but also underscored that the recovery in the labor market in the US is “far from complete”.

The Fed Chairman also reiterated that the pace of cutting back Fed stimulus was not on a “preset course”.

Yesterday, the US dollar sharply lost ground against its major peers, after it became clear that manufacturing activity in the region of New York suddenly decreased in February, after a month ago it registered its highest level since May 2012. According to the results in a survey by the Fed, the New York Empire Manufacturing Index, which gauges business conditions in the region, fell to a reading of 4.48 in February from 12.50 in January. Experts had expected a considerably lesser decline of the index, to 9.50.

The gauge of new orders plunged into negative territory this month, after reaching a two-year peak in January. The gauge of deliveries also plummeted, reaching a value of 2.1 in February, from 15.5 in January.

A report by the Federal Reserve revealed on Friday that US factory production decreased in January by the most since May 2009, adding to signs that the recent severe weather conditions weighed on the US economy.

The Fed Chairman Janet Yellen cited the harsh winter and the unseasonably low temperatures as probable reasons for the weaker-than-expected US economic data, as the cold weather has affected activity in the labor market and elsewhere.

The central bank announced in December that it will pare monthly bond-buying purchases by $10 billion, after which it decided on another reduction of the same size at the meeting on policy in January, underscoring that labor market indicators, which “were mixed but on balance showed further improvement”, while nation’s economic growth has “picked up in recent quarters.”

Elsewhere, EUR/USD touched a seven-week-high at 1.3774 at 01:30 GMT, after which the pair erased daily gains to trade little changed at 1.3755 at 09:04 GMT, losing 0.03% for the day. Support was likely to be found at February 18th low, 1.3695, while resistance was to be met at January 2nd high, 1.3775.