Currency Update – Tuesday

Currency Update – Tuesday

Today is the first day of the 2nd half of the year, and it hasn't started well for the UK housing market with yesterday's news that mortgage approvals have collapsed in the UK, plus overnight the Nationwide house price survey has house prices falling again, with a 6.3% drop from this time last year. The housing market was expected to do badly with all the doom and gloom around, and it's the eight successive monthly decline so the chances of a reversal were remote. With as much as £30bn of mortgages coming out of their fixed rate periods in the next few months and many borrowers having to attempt to re-finance with houses that are now worth less, the housing sector will continue to suffer for some time.

Sterling seems unconcerned by the weak housing data and has instead strengthened on the markets, up towards, but not yet at, 2 against the US Dollar, and has climbed above 1.2650 against the Euro. The Euro itself has received a jump as the first flash estimate of CPI showed Eurozone inflation hitting 4%. This has further confirmed, as if it needed further confirmation, that the ECB will erase rates this week. Members of the ECB have already stated that this isn't the start of a rate tightening cycle, and they are  under a considerable amount of political pressure to limit rate rises; Sarkozy used the start of his EU presidency to say that 'the ECB should ask itself about economic growth in Europe, and not only inflation.'. Of course the ECB's remit is to focus on inflation, but when even the German finance minister is warning against further rate rises then it seems that the ECB have a fine line to tread.

Sarkozy also used the start of his EU presidency to try to talk down the Euro, saying that it is 30% overvalued against the Dollar, which would mean that his idea of fair value is an exchange rate at around 1.1! This isn't a level that we are unlikely to see for a long time, even with US officials attempting to talk down the Dollar. The high price of oil is likely to make the Fed's rhetoric impotent unless it is backed up by actions. Oil hit another fresh high of $143.67/bbl yesterday which was a possible factor weighing on the Dollar. The Euro has retreated slightly from it's 1.5835 high of yesterday against the Dollar, so it could be some time before the currency markets confirm to Sarkozy's view.

This morning we get a peak at the manufacturing picture in the Eurozone, US and the UK. The Eurozone figure is likely to stay steady at a level just under what is considered to show an expansion, while the UK figure is expected to decline to around the same level, which would indicate a shrinking manufacturing industry and would represent the worst figures for almost 3 years.

In the US we have the ISM Manufacturing survey which like the Eurozone and UK is expected to show a level just under growth. Further signs of weakness in the US economy will reduce the expectations of US rate rises and will weigh on the Dollar, with the markets looking towards Thursday's non-farm payrolls for clear direction.

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