Weekly US$ rates and comments - week commencing 3rd August 2009

Sterling had a goodish week gaining ground against most currencies. Confidence seems to be returning to the economy. The UK Purchasing Managers Index for both services and manufacturing are at or are fast approaching 50. This index is viewed as being in expansion when at 50 and above and both indices have been moving strongly in the right direction over the last few months. This week we get the figures for July and the expectation is for continued improvement. The rate of decline in the UK economy is also moving in the right direction hitting 0.8% for the second quarter which was a significant improvement over the first quarter’s decline of 2.5%. Interest rates are going to be kept at their current low levels for the medium term and until unemployment begins to fall. The major problem for sterling is the level of UK government debt and until there is a believable plan to bring it down the upside for sterling is limited. This week we have the Bank of England. The expectation is for not much action but for some feedback on how they view the recovery to be progressing so there is likely to be some volatility on Thursday.

 

The US$ has lost ground against sterling and has been hitting recent highs and sits close to US$1.67/£1. This is on the back of better US economic data and an improving stock market. The economic data is very similar to the UK with a deceleration in the rate of decline in their gross domestic product, increased economic activity and interest rates to be held at low levels for the foreseeable future. The reason for the decline is the view that the US$ is a safe haven asset and as conditions improve, investors are willing to invest in riskier assets such as sterling. This week we have a whole raft of US economic data starting with June’s personal income and expenditure, mid week we get the Purchasing Manager Indices for manufacturing and services and at the end of the week we get unemployment data. So will be very interesting to see what state the US$ is in by the end of the week.