Sterling had a better second half to last week following the Bank of England meeting on Thursday. The market was nervous following August's meeting when they were surprised by the BoE increasing their programme of quantitative easing by £50bn. This surprise was then compounded when the minutes of the meeting were released and it was noted that the Governor of the BoE had voted for a £75bn increase rather than £50bn. So when the BoE announcement was released Thursday lunchtime and there had been no change to UK interest rates and no increase in the quantitative easing programme, sterling regained lost ground. Strong UK industrial production figures released last Tuesday probably means that the UK economy expanded in the three months to the end of August, the first increase for over a year. This week we have the following UK data for August; inflation which is expected to show a reduction to 1.4%, unemployment which is expected to show an increase to 8% and UK retail sales which are expected to increase by 0.4%
The euro which sits at €1.139/£1 as I write has been the main beneficiary of the US$ weakness. The European Central Bank has been successful in maintaining liquidity and keeping interest rates low in an efficient manner by having a wide range of different funding mechanisms that are easy to access. This is in stark contracts to the UK and the programme of quantitative easing. Also the eurozone as a whole is emerging from recession with Germany seeming to lead the way with German industrial production data for July showing continued improvement. But these figures show an 18% fall over the prior year which just shows how big the hole is that has been dug and how it will take a long time to fill this spare capacity. This week we have a survey of German economic sentiment which is expected to show continued improvement being helped by an improvement in confidence in export-oriented sectors.
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