There will continue to be fears over the UK government-debt situation and confidence could deteriorate rapidly on fears that political factors will delay fiscal tightening. There will be reduced speculation over a near-term policy tightening by the Bank of England which will also tend to curb Sterling support. Sterling will also tend to lose ground if there is a sustained deterioration in international risk appetite. Sterling is liable to remain on the defensive, although it may be able to resist near-term substantial losses.
Sterling was subjected to volatile trading conditions during the week. Sterling weakened to lows near 0.8850 against the Euro before rallying back to near 0.87. Sterling weakened to re-test 3-month lows near 1.5550 against the dollar before finding support.
The Euro-zone vulnerabilities continued to have a mixed impact on the UK currency. The Euro-zone weaknesses could have a positive impact on Sterling as investors look to move away from the Euro. In contrast, persistent fears surrounding government debt and sovereign ratings would tend to be a negative factor for the UK currency as domestic vulnerabilities would be highlighted.
The latest economic data was mixed as the RICS reported a further increase in house prices for January while there was a weaker retail sales report from the BRC. The spending data is liable to have a bigger impact given doubts over the economic recovery and forthcoming reports will be watched closely.
The UK trade deficit was wider than expected with an 11-month high shortfall of GBP7.3bn for December which will tend to increase fears over the economic outlook. There was also a warning from ratings agency Fitch that the UK was the most vulnerable of the AAA-rated economies to a credit-rating downgrade.
There was stronger than expected industrial production data which provided some currency support.
The UK currency was then subjected to renewed selling pressure following the Bank of England inflation report. There was a slight downgrading of GDP growth forecasts within the data while the bank also expected inflation to fall back sharply to below 1.0% in the medium term from an initial peak above 3.0%.
The comments resulted in a downgrading of interest rate expectations which undermined the UK currency while there were also some fears that the bank was being complacent over medium-term inflation risks.
Swiss franc:
The Swiss currency is likely to gain some further defensive support from fears over the Euro-zone economy and there is still the possibility of firm buying support if Euro fears intensify. Speculation over National Bank intervention to curb franc strength will still be a very important market feature and the key feature is likely to be a sustained increase in volatility as market rumours of bank action persist.
The dollar pushed to a high near 1.0780 against the Swiss franc, but failed to sustain the gains and retreated back towards 1.0720. The Euro retreated back towards 1.4650 against the franc as underlying confidence in the currency remained weak.
A lack of confidence in the EU support proposals surrounding Greece will tend to maintain defensive support for the Swiss currency against the Euro.
The latest Swiss inflation data was stronger than expected with prices declining by 0.1% in January to give a 1.0% annual increase. The higher than expected figure may have some impact in lessening National Bank fears over the implications of franc strength. |