Weekly US$ rates and comments – week commencing 27th July 2009

Last week was a quite week for sterling as it tended to trade in a narrow range against both the US$ and the €. It seems to be waiting for a catalyst to give it some momentum one way or the other. The initial estimate of 2^nd quarter gross domestic product released during the week showed a larger contraction than expected but was a vast improvement on the previous quarter. This has been taken as a sign that the economy is close to the bottom of this recession. This view was also supported by the minutes from the last Bank of England meeting which highlighted that the BoE was unlikely in the short term to increase its programme of quantitative easing. The reason given was the need to properly assess the affect of the programme to date. This makes sense. The major constraint for an improvement in sterling is the level of government debt and the lack of a plan [or political will power] from the government to bring it down. Until this is resolved the upside for sterling is limited. In the middle of this week we have the release of UK mortgage approvals for June which is expected to have risen again. Otherwise it is a quiet week on the UK economic data front.

 

The US$ also had an uneventful week just gone. At the start of the week the Federal Reserve Chairman reported to Congress and made it very clear that the key aim was to continue to nurture the green shoots of recovery. Their major "support" for this approach is to keep interest rates low until it is very clear that the recovery is robust. This usually means that unemployment is falling. I have no reason to think differently this time and as most forecasts seen to think this will not happen until 2011 we are in for a long period of low interest rates. A similar approach is likely from the UK and Euro land central banks. The US$ did lose a bit of ground against sterling on the rise of risk appetite and currently sits at the top of its recent range just over US$1.65/£1 inter bank. At the end of this week we have the release of US gross domestic product growth fro the second quarter. This will give a very clear indicator of how the US economy is "recovering". A significant improvement over the previous quarter where there was a decline of 5.5% is expected but how close they get to zero will be watched with great interest.