YB Currency Update – Monday 26th October
The law of averages brings all runs to an end eventually, sometimes a negative run can end with a surprisingly good result, such as at Anfield yesterday, other times a decent run of data can take a drastic downturn as exemplified by Friday’s GDP data. Of course the GDP data was just against the grain of the recent run of optimism, taking the longer view it is in fact right in keeping with the trend and is the 6th quarter of negative growth, making this recession the longest since the 2nd world war. The -0.4% growth has led to a downgrading of expectations for rate rises, moving the first predicted rise even further into next year, and has also led to more fears/hopes that QE would be extended in the next couple of months, beyond the 175bn already announced.
With rate rises put further back and more QE on the cards the Pounds took a tumble on Friday, dropping down from above 1.66 to below 1.63 against the Dollar, and from 1.11 to near 1.08 against the Euro. The fall against the Dollar wasn’t just down to the Pound’s weakness as some disappointing industrial companies earnings reports brought the stock markets lower and gave the Dollar a little boost as risk appetite receded. The rise of the US currency brought the Euro briefly below 1.50 against the Dollar, but it has recovered to this level since as the global picture is still improving. Even with the Pounds sharp fall on Friday, it should be remembered that only 2 weeks ago it was below 1.58 against the Dollar, and below 1.07 against the Euro, so the picture is still one of,very rocky, imrpovement.
The Pound also slipped against the Australian dollar falling back towards 1.76, and it could fall further with a 30% chance of another 50bp rise when the RBA meet next week. The important data release which will determine whether rates will be raised is the Australian CPI figure this Wednesday, underlying inflation is already above target, so any sign that this is accelerating could raise the prospects of the rate rise which will lead the AUD higher.
It’s a relatively quiet week for data on the UK, with just CBI distributive trade survey, released tomorrow, some lending figures, released Thursday, and the consumer confidence figures on Friday, leaving the Pound at the mercy of the movements of other currencies. The main release will be the USA’s turn to release GDP data on Thursday, and much like the UK release the figure is expected to return to positive territory; unlike the UK, the US has a relatively broad economy, and relies less on financial services, so the forecasts are more likely to be correct. With little data released today the markets are likely to trade within relatively tight ranges.