Weekly € rates and comments – week commencing 29th June 2009

Sterling's recent run of form which started approximately 3 months ago has seemingly stalled, trading in a narrow range this week around €1.17/£1 against the euro and $1.64/£1 against the US$. At the start of last week sterling peaked momentarily at €1.19/£1 but has since edged down and has dampened expectations that we will see sterling back into the €1.20/£1+ region for a while at least. The Bank of England and its governor Mervin King have continued in their policy of trying to keep excitement for the recent gains by sterling and the improving sentiment domestically down by warning of the fragility still present within the UK financial sector and the negative effect of borrowing defaults in the future. A strong pound will also be likely to limit foreign investment and so there are strong signals that any substantial upside to sterling will be limited and perhaps even discouraged by the men at the top of the UK economy. A raft of UK economic data out this week with mortgage approvals, the Halifax house price index and the purchasing managers index all expected to show improvements and if correct will limit sterling's downside.

 

 

The euro has also kept relatively steady on the markets this week despite a rather massive injection of €442bn from the European Central Bank (ECB) in this week's 'one year funding' auction. An easing in the rate of contraction within the euro economy in quarter 2 of 2009 was the most positive of recent market data. The ECB's cautious, and in some minds slow, approach with its liquidity injections have been done with the luxury of seeing the reactions to similar measures by other central banks elsewhere in the world. So given sterling's recent rally, there was little damage to be expected by such a large contribution. However, these stimuli and asset purchases will take some time to filter through the markets and into the respective economies to then give any firm evidence of success.  This week we have the June flash estimate of consumer price inflation which is expected to show deflation. Quite a turnaround from the 4% inflation recorded last year. The weekend press was also full of the fact that the European banks have yet to come clean about the level of their bad debts arising from bad loans and this could be a major negative for the € in the medium term.