Currency Update – Tuesday 3rd August

Currency Update – Tuesday 3rd August

We had the first of the banks earning announcements yesterday, and HSBC reported a doubling of profits, mostly due to far fewer bad debts than in the previous reporting period. HSBC won’t be the only bank this week reporting profits, and the news will be full of complaints that they are paying dividends and bonuses rather than lending to a struggling economy. UK households are amongst the most indebted in the world, and previous indiscriminate lending is one of the main contributors to the recent crisis, so quite how increased lending will help pull us out of the hole we are in, rather than extending it, doesn’t seem to be getting addressed. The markets took HSBC’s profits as good news, leading to a rise in the stock markets, the FTSE was up 2.7%, and continued support for the Pound which breached 1.59 against the Dollar later yesterday, breaking through resistance levels, with 1.5970 now the next level.

The Pound’s rise against the Dollar isn’t all, or even mostly, down to Sterling strength, but also Dollar weakness. The recent raft of manufacturing data has shown the pace of growth starting to moderate a bit, no more so than in the US were the figures don’t point to a double dip recession, but do point to slower growth, which ha s led investors to seek higher growth currencies elsewhere. As well as slipping against the Pound, the Dollar has allowed the Euro to rise above 1.32, a 3 month high. Bernanke gave a speech yesterday which tried to pick a path of optimism through the US problems, predicting that rising wages would help support consumer spending in the coming months. Bernanke didn’t indicate any further appetite for stimulus measures in the US, but if there is any sign of that at the next FOMC meeting on the 10th of August, then expect the Dollar’s fall to accelerate dramatically.

In spite of the problems in the US the global picture is an optimistic one with many countries returning to growth, which has led commodity prices higher with oil rising above $80 a barrel. There is nothing today which will damage this view, with Uk construction figures likely to moderate a little from previous highs, but stay in growth, while Eurozone producer price growth will stay at moderate levels. Most of the data released today is out of the US but the inflation figures, in the form of the PCE deflator, and the pending home sales are unlikely to lend the Dollar any support.

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