The evidence continues to suggest that the economy is stabilising with a run of more favourable data. There is still a risk that this confidence will erode rapidly, especially as there are still substantial consumer debt fears. The short-term Sterling moves will still tend to be dominated to a large extent by trends in risk appetite and the currency will continue to gain support if confidence in the global economy improves. The underlying debt fears will prove to be very toxic for the currency if fear becomes the dominant influence again.
Sterling pushed to challenge 2009 highs above 1.53 against the dollar, but was unable to sustain the gains and weakened slightly over the second half of the week. Sterling found support above 1.50 against the dollar and beyond 0.90 against the Euro.
The UK economic data generally offered support for Sterling during the week. The BRC reporting a 4.6% annual increase in retail sales, although this was probably distorted by the timing of Easter. The latest RICS survey also continued to record an underlying improvement in the housing sector as the pace of price declines slowed.
The other UK data was also stronger than expected with a decline in the goods trade deficit to GBP6.6bn for March while there was a smaller than expected manufacturing production fall of 0.1%, the slowest rate of decline for 13 months. The headline claimant count data was also better than feared with unemployment rising by a further 57,100 in April. Although the ILO unemployment rate was higher than expected with an increase to a rate of 7.1% from 6.7%.
The Bank of England inflation report again had an important impact on Sterling, maintaining the recent trend of high volatility following the quarterly reports.
The bank warned in the report that the recession was liable to be deeper than expected while the recovery would be protracted and slow given the underlying stresses within the economy. The projected inflation rate was 1.0% in two years time which suggested that the bank will not be looking for an early increase in interest rates. There were no substantive comments on the quantitative easing programme as the bank stated that it will need several months to assess how effective the policy is.
Swiss franc:
The Swiss economy is likely to remain very fragile in the short-term with domestic spending only recovering at a very slow pace. The National Bank policies will remain very important in the short-term, especially as the recent inflation indicators have been weaker than expected. Given the bank’s fears over deflation, there is likely to be strong opposition to renewed currency gains. Any further weakness in the US dollar would also increase pressure for wider franc advances to be resisted.
The franc remained resilient during the week, resisting selling pressure against the Euro while it also challenged dollar support levels close to 1.10 with the dollar finding firm support close to this level.
Swiss producer prices fell 0.2% in April compared with expectations of a monthly increase. There was a 3.6% annual decline which tended to reinforce deflation fears, especially after the weaker than expected consumer inflation data last week.
National Bank member Jordan again warned that the bank wants to prevent further appreciation, maintaining the recent barrage of comments from officials. He also took a generally downbeat view on the short-term outlook with a waning that unemployment will continue to increase while the economy was likely to return to growth in mid 2010 at the earliest.
The franc weakened slightly against the Euro following the remarks, but still managed to resist heavy selling pressure. |