Underlying confidence in the economy will remain weak in the short-term. There will be a potentially destabilising mix of fears surrounding the budget deficit compounded by the risk of political inertia ahead of and following the general election which is likely to be held in May. The recent economic data should provide some degree of support, especially with the Bank of England holding policy steady. The main feature is likely to be a sustained increase in volatility over the next few weeks with advances quickly attracting selling pressure.
Sterling was subjected to renewed selling pressure on Monday and there was very heavy selling in the middle of the European session as a break of the 1.50 support level lead to an acceleration of downward pressure with stop-loss and speculative selling apparent. There was a decline to 10-month lows just below the 1.48 level against the dollar before a recovery. The Euro pushed to a high near 0.91 against the UK currency.
There were further concerns over the UK government debt situation and the fears were amplified by an opinion poll which suggested a high risk of a hung parliament in the general election which is likely to be held in May. An indecisive outcome would make it more difficult for the budget deficit to be reduced.
UK insurance group prudential confirmed that it was in advanced talks to buy AIG Asian operations for GBP23.5bn and this was also a negative factor for Sterling given expectations of heavy capital outflows.
The latest PMI data for the services sector was also stronger than expected with an advance to 58.4 for February from 54.5 the previous month. This was the highest figure for three years which should provide some degree of support for the UK currency.
The construction PMI index remained below the 50 level which maintained unease over the building sector, but the release did not have a substantial impact and there was a slightly more optimistic tone in the survey.
The Bank of England held rates on hold at 0.50% following the meeting which was in line with market expectations. There was no expansion of the quantitative easing programme from the GBP200bn level while the bank did not release a statement.
Swiss franc:
The Swiss currency will continue to gain defensive support from fears over the Euro-zone economy and there is still the possibility of firm buying support if Euro fears intensify. Any sustained deterioration in global risk appetite would also tend to underpin franc demand. Speculation over National Bank intervention to curb franc strength will still be a very important market feature and volatility levels are liable to remain higher given that intervention rumours will remain a key feature.
The dollar pushed to a high near 1.09 against the Swiss franc during the week, before retreating rapidly to lows below 1.0650. There was solid dollar buying on dips which allowed a move back towards 1.08 late in the week.
There was a fundamental lack of confidence in the Euro-zone which continued to provide support for the franc against the Euro with the Euro unable to move far from the 1.46 region
The Swiss PMI index was stronger than expected with an increase to 57.4 from 56 the previous month. The GDP data was also stronger than expected with a 0.7% increase for the fourth quarter after a revised 0.5% gain the previous quarter.
National Bank member Jordan continued to warn that franc appreciation would be blocked. There was further speculation over bank action to push the franc weaker. |