In a week that saw the UK economy embark on the next stage in its easing of restrictions, there was little in the way of fanfare, with European stock markets having what can only be described as a fairly lacklustre and directionless session. All of the main beneficiaries of the latest easing of restrictions saw their share prices come under some selling pressure.
US markets also underwent a similarly negative session with the Nasdaq once again the main drag on sentiment, though markets were able to close off their lows.
Despite moving lower yesterday European markets still seem less vulnerable than those in the US, though that’s largely down to the fact they are also cheaper.
As we look ahead to today’s European open, which looks set to be a positive one, after a decent move higher in Asia, today’s main focus is expected to be on the latest UK unemployment numbers, and in particular to see if the employment component levels have started to edge back up again.
The pound has looked quite strong in the past couple of weeks or so, as optimism grows that the number of people on furlough, still currently in the millions, will start to return to the workforce as the economy continues its reopening process, and vaccinations continue apace.
In February UK ILO unemployment slipped back to 4.9%, having been as high as 5.1% back in December. It is quite clear that the government furlough scheme is continuing to disguise the underlying effects of the pandemic, which means the very real effects on the UK labour market won’t start to be seen until Q3 at the earliest, as the furlough scheme continues to wind down.
For now, the outlook remains positive, a trend that appears to be manifesting itself in the latest monthly jobless claims numbers which showed a surprise fall in March to 7.3%. This trend of lower claims should continue in April, with a gradual move towards 7%, as more businesses reopen, and the economy returns to some form of normal, as we head into the summer.
While the outlook for unemployment appears more positive as we head into the summer months, that doesn’t mean it can’t go higher, as we head towards the end of the year and the furlough program starts to get withdrawn. Even in a best case scenario a lot of jobs that were around over a year ago, may still not come back, though a lot of them may well be replaced by different ones.
The Bank of England has already indicated that it expects unemployment to go higher, but not by as much as they thought in February when their projections were for a peak of 7.7%. This was adjusted lower a few weeks ago, to 5.2% for this year, and then down to 4.7% in the second quarter of 2022.
There is still a lot that can still go wrong, with the government being uncharacteristically cautious, about the lifting of all restrictions just over a month from now. With the Indian variant threatening to increase, the June deadline could still slip.
Later in the morning we get to see confirmation that the EU economy slipped into a double-dip recession in Q1 with a contraction of -0.6%.
EUR/USD – rebounded from the 1.2050 area last week and appears to be set for a retest of the 1.2180 area. A break above 1.2180 retargets the high this year at 1.2345. Support remains back at the 1.2040 area, with further support at 1.1980.
GBP/USD – while 1.4020 holds the bias remains for a retest of the recent peaks at 1.4180, and the high this year at 1.4240. Below 1.4000 undermines and argues for a move back to 1.3920.
EUR/GBP – failed below the 0.8630/40 area yesterday keeping the downside bias intact. A break of last week's low at 0.8560 argues for a move towards the April lows at 0.8470.
USD/JPY – currently has resistance at the 109.80 area, with a break targeting 110.20. we look to be heading back towards trend line support from the January lows now at 108.50. A move below 108.00 opens up the prospect of a move back towards 106.80.
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