YB Currency Update – Monday 1st February

It is hard to predict at the moment just how the Dollar will react to US economic news, if the news is bad you can expect the Dollar to strengthen as risk aversion hits the markets, however if the news is good the Dollar can weaken as risk aversion abates, or the Dollar can strengthen as the markets predict more near term rate rises. Friday’s US GDP figures showed the current volatility, they came in at an annualised figure of 5.7%, beating forecasts and showing just how anaemic the UK’s growth is (annualised in the same way it is less that 0.5%). The Dollar immediately strengthened, as rate rises now seemed more reasonable, and the Dollar kept on strengthening as fears over Chinese fiscal tightening and the usual worries over Eurozone sovereign debt brought risk aversion higher, which has pushed the Pound down below 1.5950, and the Euro to a 6 month low below 1.40, against the Dollar.

The Pound has also been struck by the risk aversion, independently of its rate against the Dollar, slipping to below Y144 against the Yen, and back below 1.50 against the Euro. The fall against the Euro is unusual since it is the problems with the Eurozone economy which are causing the global risk aversion. The European Commission will provide an assessment of Greece’s budget on Wednesday, in which, as they have already hinted, they are likely to demand even more action, while Spain also released a budgetary plan on Friday trying to stave of the market’s focus turning on them.

Sterling’s slip downwards is likely to be relatively short lived as it is predicated on fears that the Eurozone economies may start to stumble, the Chinese government will crush growth by tightening too early, and the US will raise rates sooner than expected with strong growth possibly fuelling inflation. Of the three risks to global GDP, the Eurozone debt seems the most likely, with tax raises and spending cuts weighing on growth, but the fears seem overblown with regard to China, who are reporting double digit growth, and with unemployment still a problem in America, Obama is about to reveal another stimulus package to try and create jobs. As long as the UK stays on the path of growth, even if it is weak, the Pound should recover along with risk appetite.

It’s a busy week for data for the UK, we get the usual PMI surveys released near the beginning of the month, along with producer price index data and a BoE rate decision. There is also an ECB rate decision and the usual non-farm payrolls report to have a look at. The week starts with a measure of US inflation, the PCE deflator, the preferred measure for the Fed as is supposed to more accurately measure real spending habits, i.e. as the price of goods goes up they comprise a smaller proportion of the overall weighting, and is lower than CPI. Before that we get PMI for manufacturing and M4 money growth for the UK. Manufacturing is likely to come out slightly weaker than expected while bank lending, as recorded by money growth, should continue to improve. The Pound is likely to stay on the back foot throughout today, as this afternoons PCE data is unlikely to reassure the markets, that the US will not raise rates.