The currency blog

Last Friday Fed Chairman Ben Bernanke suggested that the bank will do all it can to maintain the US economic recovery and gave an overview of the steps the Fed can take if growth continues to slow. Mr Bernanke said the Fed can provide additional monetary accommodation through unconventional measures if needed, especially if the economic situation continues to deteriorate. The mention of another round of QE had already been priced into the Dollar and so the speech had little impact, but the implications for the Fed stance moving forward will keep the Dollar on the back foot, especially with GDP growth also downgraded to 1.6% on Friday afternoon. This week’s data releases are focused on the US, with the closely watched non-farm payrolls figure out on Friday and the ISM manufacturing index published on Wednesday. The unemployment data is forecast to show a loss of around 100K jobs, but taking into account the recent news flow, the number may be significant lower.
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Revising UK GDP figures up a fraction has made little impression on the overall range of the pound although it is encouraging to see the sterling euro rate holding at 1.215 at the close of trading 27/08/10. Perhaps worryingly, the improvement in the pound may now have an adverse affect on UK exports which were a factor in the improved figures. Importers have a little respite with this more attractive level. Germany’s industrial figures still give the UK cause for concern in the short term, and unemployment in the UK is playing on the government’s mind, but retail sales figures show that the consumer, although shrewder, is not daunted by the austerity measures that have animated political discussion of late.

July and August are traditionally slow months in the retail money markets; however this year has shown a 10% increase in interest in overseas buys. Although some would argue that the UK banking sector does not deserve a holiday, it would seem that financial earnings figures, and a the relative evaporation of risk aversion, will find the pound at a more or less stable level come Tuesday. Next week does see weighty information released from the United Kingdom, but as we have seen over the past four weeks, sterling buyers are still keeping the UK afloat and this may transalte into an attempt to breach the higher 1.22 resistance level if the datas prooves positive.

Global markets are in the doldrums and with decreased trading volumes and a lack of positive data there has been little to prevent a downward path this week. The Dow is down 2.23% on the week and just over 6% on the month, slipping below the critical 10,000 level (closing yesterday at 9,985). S&P and Nasdaq have followed suit heading into the end of the month 6.7% and 6% down on the month. In the UK the FTSE clawed back from the 6 week low of 5070 seen on Wednesday but is still 3.50% down on the month.  In Asia, the Nikkei and Hang Seng haven’t bucked the global trend also down 5.5% and 2% on the month.
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An unexpected boost in German IFO business sentiment gave the Euro a lift yesterday. The data showed sentiment at a three year high, hitting 106.7 versus a forecast level of 105.5 and reaffirming the positive data flow from Germany over the past month. However, Irish woes continued with Standard & Poor’s, the ratings agency, downgrading their debt to AA- with a negative outlook. The huge cost of supporting the Irish banking system will push debt towards 113 per cent of GDP according the S&P estimates, well above the Eurozone average putting increasing demands on the Celtic tiger’s public finances and creating serious headwinds for economic growth. Irish ministers were understandably furious, but the fear is the austerity measures designed to reduce the government budget deficit may make the job harder because of increasing unemployment and depressing tax revenues. This fear, applicable to the other indebted Eurozone nations, is once again hanging over the Euro and is allowing Sterling and the Dollar to regain lost ground against it.
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Sales of previously owned US homes dropped more than expected in July to their lowest pace in 15 years implying further loss of momentum in the States economic recovery.  The record drop of 27.2% from June equates to an annual rate of 3.83 million units which is the lowest level since May 1995 and June’s sales pace was revised down to a 5.26million-unit pace.  Markets had been anticipating a tumble of around 12% and so were shocked with the magnitude of this figure.
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The newest member of the Bank of England’s rate-setting Monetary Policy Committee hit the headlines this morning. Britain faces “significant” risk of a fresh slump into recession according to Dr Martin Weale, who said it would be “foolish” to rule out the possibility of a double-dip downturn. He also thought the Banks central outlook on growth could be too optimistic in light of the fiscal cuts currently being implemented. The BoE forecast is for growth of about 2.8% in 2011 and 3.2% in 2012. Sterling has dropped over a cent against the dollar following the news and has traded as low as 1.5371.
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