YB Currency Update – Wednesday 15th September
Yesterday was an interesting day on the markets, first the Pound posted a small rally, as CPI showed inflation falling be less than expected, keeping at 1.8% annually as opposed to 1.6%. Price rises in ‘cultural events’, as domestic holiday providers take their opportunity to rip of ‘staycationers’, and rises in the price of fuel, up 10%, have kept inflation higher again than expectations. However the rally was short lived, as it was the Governor King’s speech which really led the markets, with comments that the BoE might reduce the rate it pays on deposits held at the central bank, causing the Pound to tumble. He also said that the recession was probably behind us, but that the recovery would be slow and that there was still downside risks to meeting their inflation target, once again, this time implicitly, raising the prospect of further QE. The Pound fell as King gave his testimony to the Treasury select committee, and has dragged lower since, opening this morning below 1.1250 against the Euro, and below 1.65 against the Dollar.
How far Sterling will fall is uncertain, the fundamentals of the economy don’t point to further falls for the Pound, as the UK economy starts to pull out of recession, coupled with recovery in the US, and although the Eurozone may be 3 month’s ahead in the cycle, the Eurozone comprises of more than just France and Germany, with many of the smaller nations, such as Ireland, suffering terribly, there is no reason to think the Recovery will be faster across the channel than it will be in the UK. Even Germany’s economy isn’t a bed of roses with the latest ZEW survey showing a smaller improvement than expected, with the expectations element strong, the current conditions part of the survey still shows extensive weakness in the current environment. However the figures have not dampened the Euro which has risen on broader issues to above 1.47 against the USD.
Stock markets, even UK markets, did not follow the Pound down, and actually rose as the global picture continued to improve, with pretty much every major economies central bankers agreeing that the recession is over, boosting risk appetite, as well as the terrible returns deposits now give, making the dividends that can be earned from holding shares, although more risky, seem attractive. The global picture was also improved by strong retail sales out of America, which rose 2.7%, above 1.9% expectations. As the global picture improves everything seems in place for Sterling to start to recover, with just the actions of the central bank seemingly holding it back.
Today we get CPI reading in both the Eurozone and the US, with both expected to be lower than the UK measure, after all their currencies aren’t suffering like Sterling is, and the Eurozone measure to remain in negative territory. We’ve just had the unemployment figures for the UK, which has risen by slightly less than expected, at least the figure of those claiming unemployment benefit has, while average earnings are up, all of which hasn’t stopped the jobless rather rising to the highest since 1996. The figures are likely to continue to rise as the employment market lags behind the broader economy, but at least it hasn’t come in any worse than expected and the Pound remains where it was before the release.