YB FX Daily Report – 12th August 2009

After hitting highs last week against both the Dollar and the Euro, Sterling now seems to be on the back foot as the MPC’s extension to the QE measures, and the BoE more pessimistic view on the UK economy. However it is not just in the UK that a bit of worry has entered into investors thinking, as the good news from corporate earnings dribbles to a close, fears that the profits are more due to extensive cost cutting than to any increased business, are making those looking ahead to the last half of the year expecting less good news. Equity markets are down, with the FTSE slipping 1%, the DAX 2.4%, and the S&P500 falling 1.3%. The latest blow to global risk appetite came in the form of less positive than hoped Chinese retail sales and production figures, which has led to the Dollar climbing, pushing the Pound down below 1.6450.

The market’s worries have also kept Sterling low against the Euro, down towards 1.1650, while the Euro itself has fallen back against the Dollar slipping down to 1.41. The Euro has benefited from the ECB’s reluctance to cut rates, or start quantitative easing in spite of one of the official measures of inflation showing the Eurozone economy dipping down into deflation. The ECB may like a weak Euro, but while they continue to talk down their currency, while the US and the UK take active measures to increase the supply of their currencies, and depress the exchange rate, then the Eurozone may have to try to recover with a strong currency.

We have the UK’s unemployment report this morning, but with the last report showing the highest levels of unemployment for 15 years, and any recovery in the economy not likely to feed through to the employment figures for some time (some are even predicting higher unemployment numbers for 3 years), then the news will almost certainly be bad. Even the bad employment news is likely to be overshadowed by the BoE’s quarterly inflation report, and tonight’s FOMC meeting. The general flavour of the BoE’s report can be deduced from the MPC’s comments after extending QE, so it is likely to be relatively downcast, while over in the US, pessimism is for the weak, and the FOMC are likely to attempt to paint a more positive figure, and may even map out in more detail how they plan to pull their QE measures, although they will once again be at pains to reassure the markets that interest rates will not be going up anytime soon.
Today has the potential to be a volatile one for the Pound and the two central bank’s reports will inject some movement into the markets, although as neither countries authorities managed to predict or avert the slowdown, why the markets listen to them so closely could be questioned.