A quiet week for sterling last week. No statements from the Governor of the Bank of England or negative economic data to undermine sterling. In fact the economic news was on the whole positive with improving house prices, retail sales and industrial sentiment. However this improvement is only gradual and similar to that enjoyed being elsewhere in the world. This worried the market as it supports the view that the UK economy has stabilised but that the road to recovery is going to be slow rather than rapid. I suspect this is what most of us already knew but the stock markets were over optimistic and pulled back. As a result risk appetite fell and safe haven assets benefited. This week we have a mixture of economic data including the September purchasing managers index which is expected to show further improvement. But the markets will be nervous for sterling as we also have the next meeting of the Bank of England on Thursday. The expectation is for the BoE to keep interest rates on hold but what will worry the bank is the accompanying statement.
The euro sits at €1.094/£1 inter bank and continues to be the most favoured currency. Similar economic data to that of the UK and the US showed that the euro lands economies were improving gradually. The European Central Bank carried out its second funding auction last week. The first one in June ended up with the ECB lending banks over €440bn. The second auction resulted in the ECB only lending €75bn which was half of what was forecast. This indicated that liquidity in the market place was much improved and lent further support to the euro. Similar economic data to the UK is released this week with the same expectation of small gradual steps forward. The European Central Bank also meets and as per the UK interest rates are expected to be kept on hold. Anything different would be a great surprise.
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