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UK unemployment expected to nudge higher, Fed and BoE speeches in focus

Despite a lacklustre start to the week over concerns that a third wave in Europe will delay an economic reopening, and push it into the middle of the summer, European stocks managed to eke some modest gains yesterday, despite the travel sector giving back some of the progress it has made in the past few weeks.

Yesterday was a reminder, if any were needed, that for all the optimism over the vaccine program, it is only as strong as its weakest link, and that link is currently in Europe, with Germany this morning imposing a 5 day lockdown over the Easter period in an attempt to stem the pace of transmission.

This presents a problem for the travel sector and the potential for a speedy recovery, given the slow nature of the rollout due to supply, as well as hesitancy concerns. When set against rising infection rates across Europe, it is likely to mean that even in the event of a successful rollout in the UK, it's highly unlikely that international travel will be able to return in any meaningful way while a large part of Europe remains behind the curve in inoculating its populations.

US markets also managed to start the week on the front foot, as a modest decline in long term US treasury yields saw a rotation back into tech stocks, with the Nasdaq leading the way higher, though it was notable that the Russell 2000 finished the day lower. 

While a lot has been made of the risks to US stocks of the sharp rise in US 10-year bond yields over the past few weeks it is also worth noting that despite an almost doubling of the US 10-year yield since the beginning of the year, the S&P 500 is still up over 6% year to date. Against this divergent backdrop Asia markets have also slipped back, and this in turn looks set to act as a drag on European markets this morning, as concerns over European attempts to curb the virus tempers overall sentiment.

As we look ahead to the one year anniversary of the first UK lockdown, the initial focus today is on the latest UK unemployment numbers for January and February, which again are likely to paint a rather distorted picture of the UK labour market. The ILO measure for the three months to January is expected to show a modest increase to 5.2% from 5.1%, and which due to furlough will continue to understate the true UK jobless picture. The one thing we might see is that the January lockdown could well have prompted an acceleration in redundancies, as some businesses throw in the towel on any imminent reopening. In December, we saw the number of redundancies announced in the three months to the end of the year rise by 30,000, to 343,000.

On a more positive note, the number of payrolled employees did increase by 83,000 in January, however the number of jobs lost since this time last year is still more than 700,000. The outlook is also starting to look a little brighter if the latest economic projections from the OBR are any guide. Earlier this month they upgraded their economic projections for unemployment down from a peak of 7.5% to 6.5%, as the chancellor set out his various measures to extend the furlough, as well as reductions to key tax and business rates. It’s still worth keeping track of the monthly jobless claims numbers which are a much more accurate reflection of the labour market, and which fell to 7.2% in January, down from 7.4% in December.

The Bank of England has also painted a much more positive picture for the UK economy, with markets likely to pay close attention to the likes of chief economist Andrew Haldane later this morning, who is one of the more bullish members of the MPC, and who has expressed optimism about a coiled spring economic rebound, followed by deputy governor Jon Cunliffe an hour later, and finally governor Andrew Bailey, just before midday.

Fed chairman Jay Powell will also be testifying later this afternoon, along with treasury secretary Janet Yellen to the House Financial Services committee, as both are questioned on the current policy responses to the ongoing pandemic. We shouldn’t expect too many surprises from Jay Powell as he’s been fairly consistent in his messaging these past few days, in terms of the central bank’s focus on the unemployment component of its mandate. The released statement last night reinforced the Fed’s optimism about the glide path of the current economic rebound, but also reiterated that the recovery was in the foothills, and support was set to remain for the foreseeable future. We’ll also be hearing from permanent Fed board member Lael Brainard who is also one of the more dovish members of the FOMC.       

EUR/USD – continues to find support just above the 200-day MA at 1.1850, but current rebounds still look weak. We need to get above 1.2050 to stabilise or risk a retest of 1.1800, and possibly lower.  

GBP/USD – still finding support just above the 50-day MA at 1.3810 but needs to overcome the 1.4020/30 area to stabilise or risk a return towards the lows this month at 1.3760 and ergo the 1.3720 area. A move below 1.3720 undermines the bullish scenario, and argues for a move towards 1.3580.

EUR/GBP – finding some decent support just above the 0.8540 area. The bias remains for a move lower towards 0.8400. Any rebound needs to overcome the 0.8730 to delay this outcome with any squeeze likely to find 0.8800 a huge obstacle.  

USD/JPY – unable thus far to crack up beyond resistance at 109.30, with the bias still for a move towards the 110.00 level while above the 108.20 area. At current levels we do remain susceptible to a pullback towards the 107.30 area in the interim. The current uptrend from the January lows lies all the way back at the 200-day MA and 105.60 area.

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