As UK Unemployment Falls, Pound Hits 1.22 against the Euro

April 18, 2012 | By | Reply More
Welcome to my weekly update regarding the foreign exchange rates. These are intended as a very brief guide to what’s affected the market in the last week, to help you decide if now is the best time for you to change currencies.
Here are the main points this week:
1. The pound has hit 1.22 against the euro as UK unemployment unexpectedly fell by 33,000. This is the highest exchange rate since late August 2010.
2. Spain looks set to avoid a bailout for now as its bond yields edge back beneath 6.0%. Nonetheless this is a lingering threat, and it will weigh on the euro.
Let’s look at these points in more detail;

Pound has increased to 1.22 against the Euro in the short term. No respite for the Euro in sight.

1. Pound climbs as UK unemployment falls by 0.1% to 8.3%.
This data was only announced 45 minutes ago at the time of writing so details are sketchy.
Nonetheless the basic idea is that the UK reversed 18 months of climbing unemployment in March to create 33,000 jobs. This was enough to reduce the headline unemployment rate by 0.1% to 8.3%. Furthermore it lends credence to Chancellor George Osborne’s hope that the private sector can make up for losses in public sector jobs as he cuts spending.
Of course regarding the pound, this is great news for the UK economy, and sterling has hence surged to 1.22 against the euro.
Is this the start of a steady increase in UK employment? Or a blip in a worsening outlook?
2. Spanish bond yields ease back beneath 6.0% – for the moment.
It’s seems as though a black cloud has hung over Mariano Rajoy’s government these past three months.
It implemented more reforms in its first 100 days than perhaps any government in recent memory, aimed at opening up Spain’s labour markets and cutting €28bn in debt. But in spite of it all the markets balked, and Spanish bond yields have crept up to dangerous levels of 6.1%.
Yesterday afternoon though, it seemed the markets took fright at what panic they themselves had created, and Spanish bond yields fell back beneath 6.0%. With luck, this will mark the start of a reprieve for Madrid, in a crisis that really does threaten the foundations of the Eurozone.
Nonetheless, the euro looks set to remain under pressure.
Is Spain in line for a bailout nonetheless? Is this the end of the euro? What do you think?
Looking ahead
Last week I wrote that it would take something special to push the pound up to 1.22. It seems falling UK unemployment was that something special, and in fact this did come as a complete surprise. Although the rate of change has been falling in recent months, the UK unemployment rate has still been increasing with the private sector proving cautious about picking up the public sector slack.
So can the pound keep these gains? Well, in my experience, a currency can surge in the immediate aftermath of some great data, but then declines again as the euphoria fades. I wouldn’t be surprised to see this happen to the pound, and have it drop back to 1.21.
Nonetheless, if this does mark the start of a real divergence in the fortunes of the UK and Eurozone economies, a rising pound could be something we get used to seeing in coming months.
I hope this post has been of interest. I will of course return with my next update next week. Of course, if you have any questions about transferring money abroad in the meantime, don’t hesitate to leave a comment below. I’ll get back to you as soon as I can.
Peter Lavelle
Foreign Exchange Specialist Pure FX

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Category: Currency news, Unemployment

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