Currency Update – Thursday

The bad week for the Pound continued yesterday, as hawkish comments from an ECB member strengthened the Euro, and some good data out of the US also pushed the Dollar higher against Sterling. August is the holiday season in the northern hemisphere, so as British traders take their children abroad for a glimpse of sunshine, trading volumes are thinner, which often promotes increased volatility, and this can definitely be seen in the markets lately. ECB member Weber’s comments often see him hitting the headlines, and yesterday he said ‘I think the discussion about declining rates in Europe is premature’; he also seemed to hint that the ECB would ride out the current economic downturn with rates on hold, and then raise rates once the economy starts to recover. The ECB have come under some criticism lately for ignoring the economic downturn in the Eurozone, and this is unlikely to abate while members are making such statements.
 
Sterling dropped against the Euro, falling below 1.24 briefly, before bouncing back upwards. Even the news overnight from the Nationwide that the price of houses has fallen over 10% in the last year, which is hardly surprising since mortgage approvals are also down 65%, has failed to make much of a further dent on the GBP/EUR rate. House prices have been falling steadily for some time, driven by a loss of economic confidence, but also by the particular conditions caused by the credit crunch, which has seen borrowing costs rising, divorced from the BoE base rate, and the willingness of mortgage lenders to lend at all, dropping.

Sterling has also fallen against the Dollar hitting a low below 1.83, before also bouncing back this morning. The drop can be blamed upon the Nationwide house price survey, and on the fears that the UK’s biggest exporter, the Eurozone, has got some hard times ahead, but a better than expected durable goods orders for the US will not have helped. Durable goods, are products, bought by manufacturers, that are intended to last for more than 3 years, therefore represent a significant investment, and are sensitive to the vagaries of the economy. The numbers actually rose by 1.3%, surprising on the upside. The numbers gave the dollar a boost, in spite of the price of oil also rising, as the hurricane season starts and already there are fears for the oil platforms in the Gulf of Mexico.

Today in the UK we have the CBI Distributive Trade survey which is likely to show spending softening. Retail spending has been relatively strong compared to other measures of the UK economy, but as the downtrend continues it will start to effect all aspects of the economy, and today’s measure is expected to show that.

Later in the day we have a number of minor data releases for the Eurozone, and also a revision to 2nd quarter GDP for the US. The expectations are for growth to be revised upwards, to take into account greater exports, and further confirming the United States climb out of it’s troubles.

Michael Corcoran | Treasury Solutions | nabCapital