The Pound's rally over the weekend, caused by the expectations of a bail out of the US auto industry, slowly ebbed away yesterday as Sterling slipped against both the Euro and the Dollar. There was some economic news to contribute to the Pounds slippage, as producer prices showed both input and output price falls, however the figures did show a smaller fall than many expected in the core inflationary pressures, which is good news for the prospect of avoiding a possible deflation of the Pound. The Pound has slipped back to around 1.15 against the Euro, and back down below 1.48 against the Dollar, as Monday's brief rally proves short lived.
The Pound's slip backwards is not being caused by a decline in global optimism, which has actually increased as details of Obama's socialist program leak. As well as the auto industry bail out, there is also talk of a $500bn infrastructure investment to stimulate the economy, reminiscent of the new deal of the 1930s, or perhaps more recently, 'communist' China's economic stimulus package. The markets seem to approve, as equities were up globally, our own FTSE rose by 6.2%, commodity prices are also up, with industrial metal prices rising by almost 5%. However the increased US government debt such spending will create could be the reason the Dollar has not continued it's strong showing from over the previous months. The Dollar strength has been slipping away over the last two weeks, it's performance against the Pound excepted, which has allowed the Euro to climb back towards 1.29, and the Yen to climb to Y92, against the USD.
The Australian Dollar is another currency which has benefited from the Dollar's slip, climbing back towards 0.66 against the Dollar, and around 2.25 against the Pound. The Aussie Dollar has stayed relatively buoyant even in the face of dramatic declines in commodity prices, and expectations of interest rates falling to 2.75% next year, this is probably due to the resilient character of the Australian economy which may not slip into recession unlike many of the other major economies. If the stock markets keep buoyant then the AUD may stay strong on the back of risk appetite, however the longer term trend may not be so rosy if commodity prices stay low, and the Australian economy starts to slide into recession.
We have a busy day of economic data for the UK; we've already had news that the numbers of people seeking to buy a house has risen from the first time in two years, although whether any of them can get a mortgage is another matter. The RICS house price survey, released overnight, still showed a sharp fall in house prices, albeit at a slower rate, and the DCLG house price survey released this morning is likely to follow suit. We also have trade balance and industrial production figures, neither of which are expected to bring any good news for the Pound, so Sterling is likely to be once again on the defensive.
Michael Corcoran | Treasury Solutions | nabCapital