Currency Update – Monday 26th January

Last week was a grim week for Sterling, which fell almost 10c against the Dollar, and 5c against the Euro. The week ended on a sour note with Q4 GDP figures showing a quarterly fall of 1.5%, more than the market expected and when coupled with an improvement in the German ZEW survey, although that survey was still at very low levels, Sterling fell to 1.05 against the Euro over the weekend. This morning trading has been quiet with Asian and the antipodean markets closed for holidays, but what trading has been going on has focused on Sterling, and the Pound has started the climb back above 1.06 against the Euro, and above 1.37 against the Dollar, after falling to a low of 1.3550 against the US currency.

The UK has many problems, not least the state of public finances and a weak manufacturing sector struggling to take advantage of the weaker Pound, but it is not unique in suffering the recession, and after getting all, or at least most, of the bad news out of it’s system last week, it could be that the current weakness of the Pound has already built in the UK’s weakness. Trader’s attentions will now be elsewhere to problems in Europe and America. Both economies are also struggling to cope with the global slowdown, although the Dollar has benefited from Obama’s plan to spend billions of Dollars to stimulate the economy, as well traders investing in the traditional safe haven of the US Dollar.

The Euro has made large gains against Sterling over the past months, and although it has slipped back against the Dollar, it is likely to fall even further. The Euro has dipped below 1.30 against the Dollar after a few weeks of recovery at the end of last year. The Euro has been benefiting from short term investment flows due to the slow nature of rate cutting by the ECB, however that slow cutting may also make the recession longer and deeper than it would have been if the ECB had followed the Fed’s response, and with different countries suffering the recession to different degrees and in different ways, there is speculation that the Euro itself may face an existential threat, with countries who cannot handle the pace dropping out of the single currency. The recent recession was also going to pose the Euro’s biggest test, as a multispeed economy is handled by a one speed interest rate strategy, but the chances of one country dropping out are very remote, although for speculation even to arise shows how bad things are.

This week should start to shift the focus away from the UK, as we have little of interest released, instead we have the Fed’s latest rate decision on Wednesday, as well as Q4 GDP figures for the US on Friday. The GDP figures are expected to show just how bad the recession is biting across the pond, with an annualised figure of a drop of 5% or more; there is little the Fed can do about the downturn, at least not using interest rates with the Fed funds rate already at, or near 0%, but Wednesday’s statement may give some details on what other measures the Fed may take, including ‘quantitative easing’.
In the Eurozone we have a number of economic survey’s to fill the week, with Thursday hosting the usual end of month survey releases, but the month will actually end with a CPI estimate on Friday, which is expected to show a further dip in inflation.
This week is likely to see Sterling start to climb, although after the disaster of last week the currency has a long way back to levels we saw only a few days ago.