Currency Update – Friday 6th February

The heavy snow may have left some commuters stranded and stuck, waiting for rescue, but the Pound has not needed such help bursting out of it’s shackles to rise significantly after yesterday’s rate decisions. Both the MPC and the ECB delivered the decisions that the market widely expected, a 0.5% rate cut and no change respectively, but it was the details of the statements which have shifted Sterling. The MPC did indicate a pause in the rate cutting cycle, by stressing that the ‘transmission mechanism of monetary policy was impaired’, and indicating that they think that any further rate cuts will have little effect on the amount of money in the economy; they did however point to previous rate cuts, the fall in Sterling, and the fall in commodity prices, as factors that would produce ‘considerable stimulus to activity as the year progressed.’. As the MPC announced a pause in rate cutting, the markets were also waiting to see what if any details on quantitative easing measures would be released, the fact that none were has also raised the prospects of the Pound, helped by surprise news of house price rises at the beginning of this year. Sterling has rallied over 3c against the Dollar, to almost 1.48.

The ECB prefer a more gradualist approach to monetary policy, and the Euro is starting to suffer after initially benefitting from the slow pace of their rate cuts. As the Eurozone interest rates were slightly higher than other major currencies, the Euro gained some strength from short term investment flows, but the negative data has kept flowing out of the Eurozone, making the ECB’s refusal to drop rates quickly, worrying and confusing, especially with inflation falling below their 2% target. As they did last month, the ECB indicated that it will be in March that the next rate cut is likely, and also expressed expectations of a sharp slowdown in the Eurozone activity, something that we are already seeing in the data. The Euro has weakened, especially against Sterling, which has jumped above 1.15 overnight, although it has started to drop back by half a cent.

With the UK and the Eurozone taking central stage over the last couple of days, it is the US that ends the week with the non-farm payrolls report. The employment figures are expected to be as poor as December’s, which showed a fall of 500,000 jobs, but some of the other indicators point to the risks of an even bigger drop, with the unemployment rate expected to jump to 7.5%.

The data trail isn’t quite finished in Europe though with industrial production survey’s for the UK and Germany released this morning. We’ve already had the UK figures which showed industrial production falling at it’s fastest pace since 1981, at an annual pace of -9.4%, which as industrial production is 18.4% of overall GDP, hints that the slowdown of the overall economy may be more than expected for Q4 2008, and knocking Sterling back from it’s overnight highs. The German figures, released later this morning, were expected to be even worse than the UK, as the Eurozone’s largest economy feels the pinch of the credit crunch and the strong Euro.

Sterling may struggle to hold onto all of it’s strong gains of yesterday, as the focus turns to the other side of the Pond, although with the US employment figures already expected to be awful, and many waiting in anticipation for Obama’s stimulus plan, it would take a surprising shift from the expected numbers to shift the sentiment on the Dollar.

Michael Corcoran – Treasury Partner | Treasury Solutions | nabCapital