Weekly US$ rates and comments - week commencing 10th August 2009

Last week all started positively for sterling with the purchasing manager indices for both manufacturing and services showing improvement and even indicating expansion as the readings headed over 50. As a result sterling strengthened against most currencies. Come Thursday mid-day it all came to a grinding halt and sterling went into fast reverse. The reason for this was the announcement from the Bank of England that it was going to increase the amount of funds for its quantitative easing programme by £50bn. This came as a complete surprise as the BoE had given the impression that it was likely to keep the programme on hold and if it did continue it would stick within the agreed government limit of £150bn. The increase of £50bn takes the full amount to £175bn. Also the positive economic data that has been released over the last few weeks increased confidence that the worst of the recession was over but this action by the BoE [with their access to more detailed information] indicates that they believe this not to be the case. In fact they have said that the recession was deeper than first thought which is believable as I think a lot of people are still in denial and the recession has along way to run. As I have noted previously it should not be assumed sterling will continue to appreciate as its problems are very serious. In fact the International Monetary Fund has stated that on a purchasing power parity basis the correct rate for sterling would be US$1.53/£1. This week we have growth and inflation data from the BoE which should go someway to understanding the reason for their increase in quantitative easing. We also have updated unemployment figures which are set to increase further. These all happens on Wednesday so expect some volatility leading up to this..

 

The US$ is hovering around the US$1.665-1.670/£1 inter bank level. A raft of economic data were released last week. There was a third month of increased factory orders and on the back of this the US$ lost value as risk appetite increased. In fact we saw the US$1.70£1 breached for the first time this year. But following the BoE’s announcement on Thursday we saw a pull back with the US$ strengthening. The unemployment figures released last Friday were better than expected and indicated that the US economy was stabilising and for the first time in a while we saw the US$ strengthen on the back of positive US economic data. This week we have the Federal Reserve meeting on Wednesday and on Friday industrial production data for July. Will be very interesting to see if the US$ has reversed its trend of falling on good news and rising on bad news and that economic data rather than safe haven status is the driving force for its future direction.