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The dollar hit a two month low against the euro and a basket of major currencies as soft inflation and manufacturing data added to concerns about the strength of the U.S economy. Data released showed a third straight monthly decline in producer prices and came just a day after the Federal Reserve meeting minutes revealed policymakers think they may need to do more to boost the economy if a stuttering recovery slows any further. Eurodollar soared towards 1.30 while Sterling rose to 1.54 as investors removed their money from the safe haven currency. The dollar will remain under pressure if the current run on weak data continues. Today’s CPI and University of Michigan consumer confidence figures could foster some USD strength, though consensus is low.
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Sterling has done its best to hold form above the 1.18 level before Friday’s close, but the slide from 1.20 over the last 12 hours is symptomatic of a market uncertain about the worth of imminent stress tests, and the long term implications of European regulatory changes such as the Alternative Investment Fund Management directive.
Germany and France have adopted something of a ‘dog in the manger’ attitude, and seem willing to risk the movement of key fund and asset management services to the Far East in order to provide a more even European playing field. Measures like the AIFMD will have a negative effect on European and London based trading, and wealthy tax payers will leave the EEA and UK for softer structures off shore in countries like Singapore and Hong Kong.
Key figures in the banking sector have firmly stated that the upcoming ‘stress tests’ will not, if weathered, signify a clean bill or health; and issues such a deflation, high levels of government debt and a spike in investment interest rates because of said sovereign liabilities still plague the markets and undermine confidence.
Sterling has settled to the 1.18 level, and this was to be expected after such a frantic rally following the May election and the Budget in June. 1.20 is still achievable, but with luke warm economic data it will be difficult for us to find support above this key level in the coming weeks.

The Federal Reserve minutes released last night show the FOMC expect inflation to remain subdued over the coming months, some members even revised down their estimates due to the ongoing problems in financial markets around the world. The Fed also noted that they expect unemployment to continue to rise and now forecast that full economic recovery could take five to six years. The dovish tone and disappointing advanced retail figures yesterday, 0.5% against a forecast of 0.2%, has allowed Sterling and the Euro to push higher vs the Dollar.
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UK CPI rose by 3.2% y/y in June 2010 compared to 3.4% in May, more than the 3.1% average forecast by analysts. RPI decelerated to 5.0% in June compared to 5.1% in May. RPI-X also slowed from 5.1% in May to 5.0% in June. However, core inflation accelerated from 2.9% in May to 3.1% in June, which matched the highest reading since 1997. According to the Office for National Statistics, the biggest downward pressure to CPI inflation between May and June came from falling energy (petrol and diesel) prices. Another significant downward contribution came from clothing and footwear, where prices fell due to the June sales season.
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Sterling weakened yesterday after the S&P said it was maintaining its negative outlook on UK’s AAA credit rating. Data released from the UK included a survey by GfK, which showed 58% of U.K. households expect economic conditions to deteriorate further, with nearly two-fifths of the respondents looking to cut back on consumption. In addition, the final Q1 GDP reading showed economic activity expanded 0.3% from the last three-months of 2009, which was largely in-line with the initial forecast. However, the growth rate slipped 0.2% from the previous year to mark the slowest pace of contraction since the third-quarter of 2008. Comments from the BoE’s Posen that a continued UK recovery can not be guaranteed also weighed on the currency.
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The recent Sterling and Euro rallies finally ran out of steam at the weekend. The Euro hit a two month high against the Dollar before running into large selling resistance and falling back towards 1.25. This week sees US firms reporting their quarter two numbers, the usual window dressing and massaging of numbers will likely induce a fair amount of volatility in the stock and currency markets but the market believes an overall positive theme should emerge and this is producing the current Dollar strength. Although German manufacturers posted some impressive sales figures at the end of last week and boosted confidence in the continuing Eurozone economic recovery, fears over manufacturing and unemployment data in periphery member nations is swamping any and all positive news from Germany. Added to the muted response to the Stress test methodology there is enough news around the keep the Euro suppressed for the next few days.
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