Last week was one of those weeks where a lot seemed to be happening but sterling marked time against the US$ and the €. But not when compared to the commodity backed currencies against which sterling lost significant ground. This followed the Bank of Australia raising their interest rate. The Bank of England met on Thursday. This was against a background of poor industrial data for August and a disappointing purchasing managers index for September, although the corresponding service managers index was positive. In the event the BoE kept UK interest rates on hold and made no announcement on increasing the quantitative easing programme from its current level of £175bn [they have used £162bn so far]. The moment of truth will be their next meeting in early November when they will have further information on the UK economy and its recovery and whether or not there is a need to increase the quantitative easing programme further. I suspect they will have to and this will more than likely to be sterling negative. This week on the economic data front we have UK inflation and unemployment figures. As the rest of the world experiences deflation the UK still has inflation although it is expected to fall to 1,3% the lowest rate for five years. UK inflation seems to be the result of sterling's weakness making imports more expensive.
The euro is still top of the pile and sits at €1.071/£1 inter bank. The European Central Bank met this week and kept interest rates on hold. However the ECB would like the euro to weaken as its strength is making exports too expensive. And as a consequence they expect the current deflation to take a while to turn to inflation. Will sterling hit parity against the euro? Very difficult to tell but there seems little UK news to turn the current trend around. There seems to be a dearth of euro land economic data this week so little data to upset the €'s current strength.
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