Currency Update – Monday

Currency Update – Monday

Last week saw the Dollar shoot out of the blocks like a Jamaican sprinter, extending it's rally from the previous week, partly on signs of recovery in the US market, but also due to more indications that the slowdown started by the US, is spreading across the globe, and particularly to the other developed economies. The Pound dropped almost 3% against the Dollar, falling below 1.87, and the Euro fell 1.6%, sitting around 1.4750 when only just over a month ago it hit it's all time high above 1.60. The Dollar kept on a broadly positive course on Friday with better than expected releases for manufacturing figures, and an industrial production survey, although consumer confidence was a little lower.

The expected global slowdown has downgraded expectations of demand for commodities, leading to price drops. Oil is now below $114/barrel and the index of industrial metal prices has also fallen. This has hurt the commodity currencies with the AUD falling almost 10c against the Dollar, and 8c against the Pound, in one month.

Sterling suffered last week as the BoE's quarterly inflation report painted a gloomy picture of the UK economy with slower growth and higher inflation. The markets interpreted this as a dovish message, even while the BoE forecast predicted that inflation would come back with 2% within two years, assuming that rates stay at 5%. The Pound dipped down to around 1.25 on the news, after previously climbing above 1.28 on the back of downward revisions to Eurozone GDP. The weakness in the Eurozone economy has allowed Sterling to start to climb upwards back up towards 1.27.

It's a quiet day today on the data front, with just the Rightmove house price survey released this morning showing yet more house price falls (-4.8% yoy) and price drops over all different areas of London. This week could prove troublesome for the Pound, with the Bank of England minutes likely to continue the gloomy sentiment found in the BoE report, although it is also likely to continue to display the split within the MPC with only one vote for a cut, and one for a rise.

Later in the week we have Retail sales, which advance surveys predict will be a drop, and to end the week on a soft note, service sector and industrial surveys point to a possible downward revision to 2Q GDP figures, released Friday, which is likely to hurt the Pound. Sterling may gain some strength if the voting in the BoE minutes is skewed towards a rise, or if the markets decide that the Pound has fallen more than enough already and the recent move is overdone, but the sentiment for the British Pound is as gloomy as the weather.

Michael Corcoran | Treasury Solutions | nabCapital

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