YB Currency Update – Tuesday 9th February 2010

YB Currency Update – Tuesday 9th February 2010

After the weak GDP figures for the 4Q of last year, fears were raised that it would be easy for the UK economy to drop back into recession (not an official recession of 3 consecutive quarters, but certainly back into negative GDP). Some of the fears noted the terrible weather we had at the start of the year, which was predicted to create a drag on consumer spending, and overnight the BRC retail monitor has proved those fears to be correct. The figures have shown the worst growth in retail sales for 15 years, with the deep snow and the return of 17.5% VAT blamed on the poor performance. The VAT rise does seem to have an effect especially as food sales, which are largely exempt, were the strongest component in the sales figures. We also had a house price survey released overnight, with a small uptick in the headline figure, but new buyer enquiries dropped, once again blamed on the bad weather, and with mortgage lending now more restrictive/responsible, plus the rise in mortgage payments later in the year as interest rates rise, the housing market is likely to remain weak.

The poor overnight data has not really hurt the Pound, which has actually rallied a bit against the Dollar after almost touching 1.5550 yesterday, to sit above 1.56. Today's business news headlines, at least on Radio 4, talked about the large speculative positions betting on a weaker Euro, and they explicitly linked it to the same kind of movements that broke Sterling out of the ERM, making some a fortune at the expense of the government. The Euro is a much more robust system than the ERM and there is no chance of a similar collapse. In fact the news headlines are actually slightly behind the markets as the Euro recovered slightly yesterday, pushing back up above 1.37 against the Dollar. Yesterday's recovery could be due to the slight narrowing of the spread between the price of debt between Portugal, Greece and the other, more stable, Eurozone economies; however it could also be due to the large speculative positions leaving little extra cash to drive the Euro lower still, and the rally upwards might just be another chance to sell the Euro.  The Euro's recovery has pushed the Pound  down to around 1.1350.

After yesterday's extremely quiet day there is a little more data out today; on top of the overnight retail sales and house prices, we have the visible trade balance figures which are expected to narrow as the weaker Pound continues to help exports and stronger growth abroad should stimulate demand. It seems that the UK's appetite for imported goods hasn't diminished even with a weaker Pound, as the trade gap has unexpectedly widened, driven largely by non-EU imports. The slip has not effected the Pound too much so it looks like it will be pulled around by market risk appetite once again.

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