The economy will remain in serious difficulties in the short-term. Sterling will also remain vulnerable to selling pressure on the lack of yield support while quantitative easing will pose very important medium-term risks to the currency. There will still be protection in relative terms given the serious downturn in the US and Europe while the Bank of England has signalled that there will be no further interest rate cuts. The scope for rallies will be severely constrained unless there is improved confidence towards the financial sector.
Sterling had a slightly softer tone against the dollar over the week, but did find solid buying support below 1.40 with a recovery back towards 1.43 on Friday. The UK currency was also resilient against the Euro with good support close to the 0.90 area.
The UK PMI manufacturing index fell to near-record lows of 34.7 in February from 35.8 the previous month with weak exports despite the improved competitive position. The construction PMI index weakening to a record low of 27.4 in February from 34.5 previously which increased fears over the construction sector. January mortgage lending was only 10% of the levels seen in the same month for 2008.
In contrast, the CIPS index for the services sector edged higher to 43.2 for February from 42.5, edging further away from the record lows seen late in 2008. The data suggested that the services sector may be holding up better than in the Euro-zone.
The Bank of England interest rate decision was in line with market expectations with a further 0.50% cut in benchmark rates to a fresh record low of 0.50%.
The central bank also announced that it would launch an initial GBP75bn quantitative easing programme by purchasing long-dated government bonds and the total under the scheme could be increased to GBP150bn.
The move to direct money supply expansion was seen as a negative factor for Sterling, although there will also be some hopes that the economy will gain support. Bank of England Governor King also stated that it was very unlikely that interest rates would be cut again which provided some degree of support to the currency.
Swiss franc:
Confidence in the Swiss economy will remain weak in the short-term , especially as the survey evidence has continued to suggest further deterioration, possibly at a faster pace than in the Euro-zone economy. The franc will still gain some defensive support at times, especially when global risk appetite deteriorates. The currency will struggle to make any strong headway, especially given the potential for National Bank intervention if there is a rapid advance.
The franc struggled for direction against the dollar for much of the week, but found support on losses to beyond the 1.18 level and strengthened to 1.15 on Friday as the US currency came under pressure. The franc had a firm tone against the Euro and strengthened to near 1.46 which was the strongest franc level for 2009.
Despite the domestic weaknesses, the franc still gained defensive support when risk appetite deteriorated and global stock markets were subjected to selling pressure.
The Swiss GDP data was better than expected with the fourth-quarter decline held to 0.3% compared with the consensus estimate of a 0.8% decline while consumer prices rose a slightly stronger than expected 0.2% in the year to February.
The latest Swiss PMI data was weak with a further decline to 32.6 in February from 35.0 the previous month and confidence in the economy remained weak. |