Weekly € rates and comments – week commencing 3rd August 2009

Sterling had a goodish week gaining ground against most currencies. Confidence seems to be returning to the economy. The UK Purchasing Managers Index for both services and manufacturing are at or are fast approaching 50. This index is viewed as being in expansion when at 50 and above and both indices have been moving strongly in the right direction over the last few months. This week we get the figures for July and the expectation is for continued improvement. The rate of decline in the UK economy is also moving in the right direction hitting 0.8% for the second quarter which was a significant improvement over the first quarter's decline of 2.5%. Interest rates are going to be kept at their current low levels for the medium term and until unemployment begins to fall. The major problem for sterling is the level of UK government debt and until there is a believable plan to bring it down the upside for sterling is limited. This week we have the Bank of England. The expectation is for not much action but for some feedback on how they view the recovery to be progressing so there is likely to be some volatility on Thursday.

 

Euro land still seems to be lagging the US and the UK in its economic recovery and the Euro is hovering around €1.17/£1 inter bank. Euro land reacted more slowly in addressing the key problems and also has a wide range of different economies to try and manage which is far from easy. Germany suffered a larger than expected increase in unemployment last week which I think is a good indicator of the depth of the problems that exist within their industrial power base. And deflation seems to be the order of the day throughout euro land. The European Central Bank also meets this week and will be questioned on how there programme of buying covered bonds is going and whether or not this is working. Given that it only started in July it is probably too early to tell.