FX - British Pound Threatened with Soft Jobs Report Ahead of Austerity Budget

The British Pound may decline as May’s jobs report shows improvement in the labor market is be losing steam, threatening economic growth prospects as the government prepares an austerity-focused emergency budget.

Key Overnight Developments

• New Zealand Consumer Confidence Soars in Q2 on Unemployment Drop
• UK Consumer Confidence Falls to 11-Month Low Ahead of Austerity Budget
• Japan’s Service Demand Rises for First in Three Months, Outlook Clouded

Critical Levels



The Euro tracked slightly lower against the US Dollar in Asian hours, down as 0.1 percent as markets retraced New York session gains. The British Pound was little changed ahead of the opening bell in London, with prices oscillating in a narrow range around the 1.48 figure.

Asia Session Highlights



New Zealand Consumer Confidence rose to the highest level since the three months ending September 2009 in the second quarter according to a report from the Westpac Banking Corp, which it attributed the increase to the sharp drop in unemployment at the beginning of the year.

Meanwhile, a gauge of UK Consumer Confidence from the Nationwide Building Society unexpectedly dipped to the lowest level in 11 months. Details of the report revealed that the outlook on economic growth over the next 6 months among polled respondents dipped to the lowest level since August 2009, likely reflecting expectations of the fallout from the government’s austerity measures to be announced as part of an Emergency Budget next week (see more below).

Japan’s Tertiary Index of service demand rose for the first time in three months, adding 2.1 percent in April. Retail and wholesale activity as well as information and communication services led the metric higher. The outlook going forward seems uncertain however with some of the government’s stimulus programs expire this year while a new program offering each family a monthly allowance of 13,000 yen is phased in. On balance, April’s labor market figures hinted firms are becoming reluctant about future demand amid fears of a slowdown in China – the core engine of demand driving Japan’s export-led recovery – hinting that lackluster hiring will weigh on consumer spending (including that on services) in the months ahead.

Euro Session: What to Expect



UK Jobless Claims are expected to see the smallest drawdown in four months, down 20,000 in May. The Claimant Count (a measure of the unemployment rate) is set to hold unchanged at 4.7 percent, marking the first in four months that the metric fails to show improvement. The outcome has significant market-moving potential: labor market conditions have cautiously but steadily improved since the beginning of the year but any signs that this trend is losing steam may weigh heavily on the British Pound as traders size up the economy’s prospects ahead of an austerity-focused Emergency Budget to be unveiled on June 22. Indeed, as we noted in our weekly British Pound forecast, the growth rate of government spending has regularly outpaced that of private consumption since the first quarter of 2008, so any retrenchment on the fiscal side is likely to bring a slowdown in economic activity. This in turn is set to keep the Bank of England (as best) committed to the current, loose monetary policy setting, an outcome that bodes ill for the UK currency.

Elsewhere on the calendar, final Euro Zone Consumer Price Index figures are set to confirm preliminary estimates to show that the annual inflation rate rose to a 17-month high at 1.6 percent in May. The outcome is unlikely to stir much of a reaction however with price growth still below the European Central Bank’s 2 percent target level and policymakers surely in no position to raise rates amid the debt crisis gripping the region. In fact, the central bank unveiled its own version of quantitative easing in May.

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