Last week all started positively for sterling with the purchasing manager indices for both manufacturing and services showing improvement and even indicating expansion as the readings headed over 50. As a result sterling strengthened against most currencies. Come Thursday mid-day it all came to a grinding halt and sterling went into fast reverse. The reason for this was the announcement from the Bank of England that it was going to increase the amount of funds for its quantitative easing programme by £50bn. This came as a complete surprise as the BoE had given the impression that it was likely to keep the programme on hold and if it did continue it would stick within the agreed government limit of £150bn. The increase of £50bn takes the full amount to £175bn. Also the positive economic data that has been released over the last few weeks increased confidence that the worst of the recession was over but this action by the BoE [with their access to more detailed information] indicates that they believe this not to be the case. In fact they have said that the recession was deeper than first thought which is believable as I think a lot of people are still in denial and the recession has along way to run. As I have noted previously it should not be assumed sterling will continue to appreciate as its problems are very serious. In fact the International Monetary Fund has stated that on a purchasing power parity basis the correct rate for sterling would be US$1.53/£1. This week we have growth and inflation data from the BoE which should go someway to understanding the reason for their increase in quantitative easing. We also have updated unemployment figures which are set to increase further. These all happens on Wednesday so expect some volatility leading up to this..
The € continues just above the €1.17/£1 rate. The European Central Bank met last week and kept euro land interest rates on hold. They are maintaining their "steady as she goes" approach even though some would argue that they need to do a lot more. I suspect what people forget is that the ECB has been very clever in making liquidity available to the banks through their secure lending schemes. In the last one they made available over €400bn which must be helping maintain the banks liquidity and ability to lend. Still there are problems that need to be addressed given the diversity of the € countries but I do get the feeling when I watch the ECB Chairman talk that he has a much better understanding of what is happening and what to do than our beloved Chancellor. The Euro zone release preliminary gross domestic product data on Wednesday and will be scrutinized to see the extent to which activity has stabilised in the second quarter.
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