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The Pound rises to its highest level since August 2012

Published: 18 Jul at 2 PM Tags: Pound Sterling, Euro Exchange Rate, Dollar Exchange Rate, Currency Exchange, Euro Crisis, UK, Economy, Inflation,

The Pound rose for a second day in a row in the foreign exchange market against the Euro after the Office for National Statistics (ONS) reported another fall in UK unemployment. The ONS data shows that UK unemployment rate has fallen to 6.5%, its lowest rate since 2008.

However, the data also showed that the rate of pay growth has also fallen leading analysts to suggest that the UK labour market is not a source of inflationary pressure. The implication is that it may reduce the need for the Bank of England (BoE) to raise interest rates in coming months.

Analysts’ also pointed out that with plenty of spare capacity still apparent in the labour market, pay growth is being prevented from picking up and is lagging behind inflation. The data showed that pay including bonuses rose by only 0.3% year on year, sharply down from the 0.8% registered in April and the 1.8% rate of a year ago.

Sam Tombs at Capital Economics said “This weakness partly reflects the fact that bonuses in April and May 2013 were unusually high, since many workers had delayed taking income until after April's cut in the additional rate of income tax. So with few signs that the labour market is a source of inflationary pressure, there remains no pressing need for the MPC to raise interest rates this year."

Meanwhile, Markit in a separate report signalled that UK households are at their weakest levels of confidence about their finances in six months with the monthly Household Finance Index dropped from 42.6 in June to 42.1 in July as UK households voiced concerns about savings, debt levels and credit availability.

Senior Economist Jack Kennedy said "The survey's main barometer slipped to a six-month low, while the future expectations index also fell, perhaps reflecting caution regarding the possibility of an interest rate rise before the year's end. However, the survey continued to signal less severe financial pressures than at any time in the five years leading up to 2014. Moreover, easing inflation perceptions and strongly rising levels of workplace activity suggest certain pressures on households may be abating, which could help offset the impact of higher mortgage costs following any action by the Bank of England to hike rates."

The Pound was broadly flat against the US dollar in the currency markets.
Elsewhere, data showed that China's economy grew at a faster than expected rate with Chinese gross domestic product rising by 7.5% in the three months to June from a year earlier, beating the forecast of a 7.4% increase.

Analysts’ suggested that the world's second-largest economy has stabilised after a slowdown earlier in the year. Meanwhile, retail sales growth was 12.1% in June, identical to the figure for May and slightly below expectations.