The latest UK labour-market data was again stronger than expected as the claimant count fell by a further 41,700 in October after a revised 44,7000 decline the previous month. Remarkably, this was the 9th successive month where the outcome has been better than expected. There was also a decline in the unemployment rate to 7.6% from 7.7% which was enough to push GBP/USD above the 1.5900 level.
In its latest inflation forecast, the Bank of England increased GDP growth forecasts for the next two years and also brought forward the expected timing of unemployment falling to 7% with a 40% chance that this could be achieved by the end of 2014. Bank Governor Carney tried to stay cautious in the press conference and reiterated that the 7% level was a reference point and not a trigger for tightening policy. Nevertheless, markets still expected rates to rise sooner than expected previously which boosted Sterling demand. GBP/USD spiked higher to the 1.60 area and EUR/GBP dipped below 0.84 in very choppy conditions.
EUR/USD hit initial resistance close to 1.3450 during Wednesday and retreated towards 1.34 without sellers having any great conviction over the move. There were limited US developments during the day with caution ahead of Yellen’s testimony to the Senate banking panel on Thursday. Investors were looking for any fresh clues on the timing of any scaling back in bond purchases given recent speculation over a move at December’s meeting.
Volatility spiked higher during the New York session with a series of verbal interventions. Euro buying against the yen initially triggered a fresh EUR/USD advance to the 1.3450 resistance area.
There were then notable comments from ECB chief economist Praet who stated that the ECB was prepared to use all tools necessary to deliver prices stability and this was implicitly pledging to beat deflation. These tools could include negative deposit rates and asset purchases. The reference to quantitative easing was more aggressive than usual from the central bank and certainly frightened Euro bulls. EUR/USD dipped sharply to test support below 1.34 with USD/CHF attempting to regain the 0.92 level.
The dollar had been struggling against the yen with a retreat to the 99.30 area before a recovery back to around 99.55 as the dollar was able to secure a wider recovery.