National Australia Bank Daily Currency Update 27th July 2009

National Australia Bank Daily Currency Update 27th July 2009

There were think-tank reports last week that the swine flu pandemic could cost the UK economy a further 3% drop in GDP, which would not be welcome given last week's reading of a surprise 0.8% drop in 2nd quarter GDP, when consensus estimates were from -0.4% to even +0.2%. With the spread of swine flu picking up pace in recent weeks, it will have had little effect on the 2nd quarter GDP figures, which fell in spite of retail sales showing a strong bump due to the spell of short weather, so any effect that swine flu does have is likely to be seen in the 3rd quarter onwards, with high levels of employee absenteeism impacting on production. As the GDP figures were are necessarily backward looking, report on the 2nd quarter while we are already in the 3rd quarter, and as they are only a first estimate that are highly likely the be revised, the terrible figures haven't hit Sterling as much as one might expect. The Pound has been weakened dropping down towards 1.15 at the start of this week against the Euro, but given the scale of the drop in activity it has shown some resilience.

Part of the Pound's limited damage comes from the global stock markets with corporate earning reports beating the, admittedly gloomy, expectations. Exchanges are now at, or near,  their highest levels this year, and when coupled with the mild recovery in US housing, they have eased some of the markets worries and increased risk appetite; indeed even the UK's terrible GDP figures are better than the Q1 output and paint a picture of the economy getting worse more slowly. The same picture has been painted across the channel with the German Ifo survey and European PMI data showing a slowing economy getting slower more slowly, which is a positive thing. The overall sense of optimism has kept the Pound near 1.6450 against the Dollar, although it had fallen to below 1.64 overnight, and pushed the Euro above 1.4250 against the Dollar.

It's a quiet week for data, at least for the UK, with only a few releases later in the week, elsewhere we get the usual month end Eurozone reports, as well the US Fed's overview of the economy in the Beige book, there is also the US 2nd quarter GDP figures which are expected to fall far less than the UK figures, not least as the Us government paid a direct rebate to US taxpayers in the 2nd quarter of this year. The general picture the data will paint up to the end of the month is likely to be the continuing story of a general slowdown in the pace of the recession which should help support risk appetite, however with very little of this data pertaining to the UK, the Pound may not be able to benefit.

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