FX Focus: Pound's rally peters out despite positive unemployment data

The pound declined sharply on Wednesday (18 January), as traders sought to cash in on profits after the previous session's rally saw propelled sterling to its best daily performance in eight years.

On Tuesday, the UK currency jumped 2.4% against the dollar, registering its largest intra-day gain against the greenback since October 2008 in the process, as Theresa May outlined her Brexit strategy.

However, the rally quickly petered out and, by early afternoon, the pound was trading 1.04% lower against the dollar, buying $1.2283, and 0.79% lower against the euro, fetching €1.1494.

The pound, however, remained comfortably above the three-month low of $1.1983 it hit in the first session of the week.

James Hughes, chief market analyst at GKFX, said the rally that followed the Prime Minister's speech had taken analysts by surprise.

"Going on past market moves yesterday's declaration of a 'hard Brexit' should have caused a lot of downside for the pound," he said. "However the fact that the 'hard Brexit' line came with clarity on a number of issues we saw huge upside in the beleaguered pound."

Meanwhile, the latest unemployment figure did not prevent the pound from declining but nevertheless made for positive reading. According to the Office for National Statistics, the unemployment rate in the quarter to November stood at 4.8%, in line with expectations and unchanged from the 11-year low recorded in the previous quarter.

The number of employed workers fell for the second consecutive month in the quarter to November, declining by 9,000 to 31.80 million. However, the number of unemployed people in Britain stood at 1.60 million, 81,000 fewer than for a year earlier.

There was positive news on the wages front, as basic salaries grew 2.7% in the three months to November, higher than the 2.6% figure analysts expected.

"It is possible that earnings growth could pick up more sharply later this year as inflation rises, but this would not be the pattern of the past decade and would probably lead to lower employment as workers started to price themselves out of jobs," said John Hawksworth, chief economist at PwC.

"Any such further pick up in earnings growth could also bring forward the date at which the Bank of England starts to raise interest rates, unless this is matched by stronger productivity growth."

Elsewhere, the dollar rebounded strongly from the bout of volatility it suffered earlier this week, as investors awaited a speech from US Federal Reserve chairwoman Janet Yellen. The greenback was 0.75% and 0.24% higher against the yen and the euro, exchanging hands at ¥113.47 and 0.9370 respectively and gained 0.20% against the Swiss Franc to CHF1.0038.

The dollar was also on the front foot against its Canadian counterpart, rising 0.53% to CAD$1.3112.

The US currency tumbled earlier this week after US President-elect Donald Trump claimed the dollar was "too strong", but Yellen's speech could deliver a shot in the arm.

"With the sheer lack of clarity provided on the proposed fiscal stimulus still grating on investor sentiment, the dollar could be exposed to further weakness in the short term," said FXTM research analyst Lukman Otunuga.

"A hawkish Yellen who remains optimistic about the US economy and future rate hikes could provide the Dollar Index a lifeline."