Sterling declines as unemployment remains high

US Dollar The US Dollar rallied sharply into London close on another eventful day in the bond and currency market. It benefited from sympathetic tumbles in the S&P 500 and other risky asset classes as bond yields spiked higher. Economic data was broadly supportive of US Dollar strength with Consumer Price Index inflation data coming in marginally above consensus forecasts, while Empire Manufacturing and Industrial Production figures likewise beat expectations. Core CPI inflation rose to 0.8 percent in the 12 months ending November, beating forecasts of a 0.6 percent. Yet the result had little effect on expectations for Federal Reserve monetary policy, and it will likely take a much larger surprise to shift forecasts for Fed policy. Moving forward, US Dollar traders will need to see corroboration from top-tier economic data to truly force a shift in broader outlook for growth. In the meantime, it seems much more important to watch for moves in US Treasuries and the S&P 500.

DATA : USD Philly FED survey (DEC), USD Initial jobless Claims (DEC 11)

Pound The British Pound fell to a low of 1.5540 overnight as the economic outlook weakened for the U.K. GBP/USD may continue to push lower throughout the remainder of the week as it retraces the last weeks move to 1.59. On the Euro front, GBP declined to low 1.17s but later recovered to 1.1770. A report by the U.K. Office for National Statistics showed claims for unemployment benefits slipped 1.2K in November amid forecasts for a 3.0K decline, while the jobless rate using the International Labour Organization’s methodology unexpectedly pushed to 7.9% during the three-months through October to mark the highest reading since April. As the pound-dollar retraces the rally from earlier this month, the pair should find near-term support around 1.5500, but could move lower going into the following week as the Bank of England is scheduled to release its policy meeting minutes on December 22. We expect the BoE to maintain a cautious outlook for the region given the ongoing slack within the real economy, but there could be a growing split within the MPC as the central bank expects inflation to remain elevated throughout the following year.

DATA : GBP Retail Sales MoM/YoY

Euro As European policy makers struggle to restore investor confidence, the European Central Bank faced increased pressure yesterday as Moody’s put Spain’s Aa1 credit under review for a possible downgrade. Moody’s said that they “can’t rule out” the possibility for Spain to tap the European Financial Stability Facility, although it didn’t seem likely. In terms of price action, the EUR/USD may continue to consolidate over the next 24 hours of trading as price action climbs back above the 20-Day moving average at 1.3327, but the downturn in market sentiment could spark another selloff in the euro-dollar as risk continues to dominate market sentiment Data scheduled for today is preliminary Euro Zone Purchasing Manger Index figures for December and the final revision of November’s Euro Zone Consumer Price Index reading is expected to confirm a print at 1.9 percent.

DATA : EUR CPI MoM/YoY, PMI Manufacturing (DEC)

General: The US government said yesterday it would sue BP for $21bn (£13.5bn) alongside four other companies tied to the Gulf of Mexico oil spill in August, for violating US environmental laws, in the opening salvo in what will likely be a lengthy legal battle. If successful the damages from the lawsuit would be on top of the $20bn that BP has already agreed to pay into a fund to compensate people on the Gulf coast who have suffered financially because of the spill.

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