Fall in UK unemployment boosts sterling

According to data released this morning, people claiming unemployment benefit has dropped. The figures showed that 20,800 fewer people claimed in June, a slight improvement on expectations but marking a smaller drop than was seen in May. The overall rate of unemployment has fallen to 7.8%, continuing its steady decline from 8.0% seen in April giving sterling an added boost, with euro/sterling rate back over €1.20.

The numbers show a growing willingness among employers to hire and should reassure policymakers that the economy is continuing to recover. However, fears are building about the impact of the coalition's spending cuts and the potential effect on the labour market is of particular concern.

Duncan Higgins, senior analyst at Caxton FX says, "Today's numbers reaffirm the improving conditions in the UK economy with claimant numbers now having fallen for the past five months. Amid expansion in most UK industries, employers are beginning to hire again but the risks ahead are growing. As yet these unemployment figures represent pre-spending cut data and the real test will be to see how the labour market holds up over the coming months."

Amid a market that is currently focused on the US corporate earnings season, the figures have provided only a slight lift for sterling.

"The pound's strength against the dollar at present is predominantly a result of improved market sentiment. Speculation is building that corporations will announce stronger second-quarter profits than expected, which is buoying demand for riskier assets," continues Higgins.

Duncan Higgins concludes, "Today's figures have enabled the pound to climb back towards €1.20. Following Greece's successful short-term bond issue yesterday, fresh impetus will be needed for sterling to consolidate its position higher."