Weekly € rates and comments – week commencing 24th August 2009

With few significant economic data releases during last week and a tentative air in the markets at present sterling merely continued in its downward trajectory, making marginal losses against most major currencies. However, a slight increase in risk-appetite and business confidence globally led to gains against the US$ as investors fled their safe-haven assets. The main focus of the economic week for the UK was this month's Bank of England's meeting minutes released on Wednesday. In the report we learnt that Mervin King (the Bank's governor) and two of the other eight members' wishes to immediately expand the 'asset purchase scheme' and inject further liquidity into the UK economy. This news instantly devalued sterling on the markets and added speculation that the governor's plans may well be supported by additional members next month as all have supported the notion. This week will see second quarter UK GDP figures, another major indicator for the current health of the UK economy.

 

There was very little significant eurozone economic data last week but the euro, currently at €1.151/£1, still buoyed by the suggestions in the previous week that France and Germany were essentially leaving recession, enjoyed a positive run against most currencies and neared a one month high against sterling on Friday. A positive trend in the results of the European PMI index since February, which is used as a strong indicator for future business activity, has been a major plus for the euro in recent months. If euro inflation figures due this week are as positive the euro may well improve on this week's good performance.

 

Weekly € rates and comments – week commencing 17th August 2009

Sterling lost ground against most currencies during the course of last week. On Wednesday we had the Bank of England's Quarterly Information Report. This gave some background as to why the BoE had increased the amount of quantitative easing to £175bn, a major factor behind sterling's recent fall. "The UK recession was deeper than originally thought which means that spare capacity is high. Even though a range of economic indicators are forecasting positive growth this spare capacity will be a drag resulting in UK interest rates being kept low for longer than the markets were expecting." The BoE continues to proffer the long hard road to recovery for the UK economy. This point is backed up by the International Monetary Fund who has long said that of the major economies the UK will suffer the most given its dependence on the finance sector. Overall sterling was trading in a narrow range against the € and US$ and is likely to do so until there is some catalyst to push it one way or the other.

 

The euro, currently at €1.157/£1, and the Euro Zone had the best of it last week with better than forecast growth for the second quarter and two of its major economies, Germany and France, even managed to show positive growth. This was a surprise as business confidence in both the manufacturing and service sectors lags that in the UK. However the expectation is for positive growth from the Euro Zone as a whole in the third quarter. 

Weekly € rates and comments – week commencing 10th August 2009

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.

 

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.