The recent economic data has remained generally encouraging. The Bank of England decision to expand quantitative easing will certainly dampen optimism over the economy and there will continue to be very important fears surrounding the government debt outlook, especially if there is evidence that banking-sector losses will escalate. Sterling will still be in a position to resist heavy losses if global risk appetite remains firm. The net risks still suggest a slightly weaker UK currency over the next few weeks as a whole. Sterling strengthened to 10-month highs against the dollar with a challenge on resistance levels above 1.70 while the UK currency also pushed to near 2009 highs against the Euro before losing ground.
The economic releases were generally favourable which provided initial currency support as confidence in the recovery increased. The Halifax house-price index rose 1.1% for July, maintaining the recent run of favourable housing-sector data.
The manufacturing PMI data was stronger than expected with an increase to 50.8 in July from 47.4 previously. This was the strongest reading and the first above the pivotal 50.0 level since March 2008
The PMI index for the services sector rising to 53.2 in July from 51.6 the previous month while there was a 0.5% increase in industrial output for June as car output recovered from the earlier shutdowns while construction activity fell at a slower rate.
The interest rate decision from the Bank of England was no surprise with rates left on hold at the 0.50% level. The decision on quantitative easing was a surprise, however, as the bank announced an increase in the corporate bond buying programme. A further GBP50bn will be bought over the next three months, taking the total to GBP175bn.
The bank was very cautious over the economic outlook, warning that the financial sector was still extremely fragile while the recession would be deeper than expected. The move to increase quantitative easing was negative for the currency and the bank’s comments also dampened the optimism triggered by recent favourable data releases.
Following the Bank of England move, Sterling weakened sharply to lows near 1.6750 against the dollar with the Euro back above the 0.8550 level
Swiss franc:
The National Bank policy actions will continue to have a very important impact on the Swiss currency. There will be deflation fears, especially if there is wider US currency appreciation, and the most likely outcome is that the bank will continue to intervene aggressively if necessary to curb renewed currency gains. These risks will increase if the is renewed downward pressure on the US dollar. The franc will, therefore, find it difficult to make much net headway. The dollar found support below 1.06 against the franc during the week and attempted to rally, but was unable to make strong headway. The Euro hit resistance close to 1.53 against the Swiss currency.
The Swiss PMI index was firmer than expected with an increase to 44.3 for July from 41.8 the previous month, maintaining the recent improving trend.
Swiss consumer prices fell 0.7% in July to give a year-on-year decline of 1.2% which was slightly below expectations and kept the National Bank alert to the deflation threat. Given these deflation fears, there will be increased central bank determination to avoid Swiss currency gains. |