Underlying confidence in the economy will remain weak in the short-term. There will be persistent fears surrounding the budget deficit which will tend to compounded by the risk of political inertia during the election period. There will be further uncertainty over the strength of the economic recovery, especially after a run of generally weaker than expected data. Comments from the Bank of England will be watched closely and any hints of further quantitative easing would undermine Sterling. Overall, it will be difficult for the currency to secure any sustained relief.
Sterling sentiment remained weak, but the currency was able to find support below 1.49 against the dollar and moved back above the 1.50 later in the week as selling pressure subsided to some extent. There was also support weaker than 0.91 against the Euro during the week.
The latest UK industrial data was weaker than expected with a 0.9% decline in manufacturing output for January, contrary to expectations of a monthly increase, although the data is likely to have been distorted by bad weather conditions.
The NIESR estimated that GDP rose 0.3% in the year to February following a revised 0.6% increase the previous month. The data maintained expectations that the economy is recovering, but doubts over the economy’s strength also continued.
The latest RICS house-price index was weaker than expected with 17% of agents reporting higher prices in March from a revised 31% the previous month which continued to fuel doubts over the economy, although the latest BRC retail sales indicator was stronger than expected.
The latest trade account data was significantly worse than expected with the goods deficit widening to GBP8.0bn for January from a revised GBP7.0bn the previous month and this was the widest shortfall since August 2008. The decline in exports was a particularly disappointing feature and tended to damage underlying sentiment towards the economy and currency.
Credit rating agency Fitch also stated on Tuesday that the credit profile has deteriorated which increased speculation that the AAA sovereign credit rating could be lost in the medium term. Fitch stated that there was no immediate threat to the rating, but also sounded an important note of concern over the commercial banks.
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. There will be cautious optimism surrounding the growth Swiss outlook. The National Bank decision to maintain its opposition to excessive franc appreciation will tend to limit the scope for currency gains and volatility will spike again if there is any renewed intervention.
The dollar was unable to sustain a move above the 1.08 level against the franc and retreated back to the 1.07 area. The Euro was trapped near the 1.46 level against the Swiss currency throughout the week.
Swiss consumer prices rose 0.1% in February to give an annual increase of 0.9% which was slightly below expectations.
As expected, the Swiss National Bank left interest rates at 0.25% following the latest policy meeting. The bank revised up its 2010 GDP growth and inflation forecasts slightly and was slightly more optimistic over economic trends with a warning that interest rates could not be left at very low levels forever given the inflation risks.
The bank also repeated the statement from previous meetings on the Swiss currency. It commented that it would aim to act decisively to counter excessive appreciation of the franc, although there was no evidence of intervention following the meeting. |