Currency Update – Wednesday 15th April 2009
There have been as many false in Sterling’s recovery as there were in last night’s Liverpool comeback. The latest has been caused by the rise in the stock markets over the past few weeks, and that seemed to gather pace over the weekend as some better then expected banking news gave support to a general, tentative, optimistic mood. However yesterday this general rise in the markets took a hit, has a surprise fall in US retail sales, they fell 1.1% when the markets expected a 0.4% rise, and this impacted the S&P500 which fell 2%, although that was probably also due to some profit taking. Financial stocks in particular took a dive after the US Treasury department commented that Goldman Sachs’ insistence that repayment of TARP as early as possible was a duty, might push other banks to repay the funds earlier than they would otherwise, so as not to appear weak, which may limit their lending ability.
The fall in stocks dragged Sterling slightly lower against the Dollar, as once again the USD benefitted from some safe haven flows, however the Pound didn’t fall far and is still above 1.4850 on this mornings trading. The Pound didn’t slip back at all against the Euro, staying supported above 1.12, and has benefitted from the RICS survey of the housing market over the weekend, which showed a small improvement from previous months, although not enough to alter the expectation that house prices will continue to fall for some time to come, there was however some pick up in activity with fewer areas reporting prices falls, and more completions.
The Pounds recent recovery has been predicated on the rise in the stock markets, and it is a reversal in the equity markets which could prove the biggest risk to Sterling, especially financial stocks. The Q1 reporting has only just started, the latest was Intel who reported better than expected profits, but expected a flat outlook for the 2nd quarter, and as other large corporates release details then the markets, and Sterling, could take a dip. One confounding factor, at least with regards to the Euro, is the actions of the ECB, and the question as to when, or whether, they will start the QE measures, and the next meeting on the 7th of May will give us some direction.
The data trail for the UK is light this week, and today is no exception with just the DCLG house price survey released, this has actually come in lower than expected, showing a 12.3% fall from the previous year, but as the report often lags other measures of the housing sector, Sterling is unlikely to be affected. This afternoon we have a batch of US data released, including CPI, Industrial production, and the Fed’s broader look at the economy, the beige book. The markets is looking for further falls in inflation, a slowdown in the rate of decline in the Industrial production figures, and a down-beat assessment of the economy from the Fed. With Sterling seemingly on the up this morning, this may not be enough to drag it back down, but if the figures come out even weaker than expected then we may see some pause in the Pounds recovery.