There will be expectations of weaker UK growth with sentiment affected in particular by the prospect of aggressive fiscal tightening and unease over the housing sector. There will be pressure for interest rates to remain very low to help support growth and there will be further speculation that the Bank of England will adopt further quantitative easing. In this environment, the UK currency will certainly be vulnerable in absolute terms. There will, however, be further protection in relative terms from a serous lack of confidence in the other main economic areas.
Sterling proved resilient against the dollar as the US currency was undermined by wider selling pressure. There was a move above resistance in the 1.60 area, although it found it difficult to gain further momentum and tested five-month lows beyond 0.88 against the Euro.
The UK currency held steady on despite another weak RICS housing survey with the house-price index dipping to -36% for September from -32% previously. The BCC also warned over a third-quarter slowdown in the economy even though playing down the prospect of a double-dip recession. There was a sharp decline in the latest Nationwide consumer confidence survey.
The inflation data also did not have a major impact with the headline consumer rate in line with expectations at an unchanged rate of 3.1% for September. The latest labour-market data was mixed as there was a larger than expected increase in the claimant count, but there was also a decline in the unemployment rate to 7.7% from 7.8%.
The trade deficit narrowed to GBP8.2bn for August from GBP8.7bn the previous month and the underlying export performance will continue to cause underlying concerns with trade not able to provide a positive contribution to the economy.
The latest leading indicators have registered a clear loss of momentum and there were expectations of a slowdown in the economy over the next few months as fiscal tightening takes effect.
There was a further focus on potential monetary easing during the week. MPC member Miles stated that quantitative easing may have to be used again over the next few months which reinforced speculation that the bank could move to additional policy easing. In contrast, Sentance maintained his preference for higher interest rates.
Swiss franc:
The Swiss franc will continue to gain defensive support from expectations that other major central banks will pursue further quantitative easing and also directly or indirectly promote a weaker currency to help boost trade conditions. There will be expectations that the National Bank will defend currency stability in the medium term. From a shorter-term perspective, there will still be the possibility of National Bank action to slow any advance, especially if deflationary pressure starts to build. The franc should be able to resist heavy selling pressure.
The franc resisted selling pressure against the Euro during the week while it advanced to a record high beyond 0.95 against the dollar as defensive demand for the Swiss currency persisted.
Expectations of further quantitative easing by the Federal Reserve and increased speculation that other countries will push for weaker currencies continued to provide underlying support to the Swiss currency.
There were some rumours of National Bank intervention as the Swiss currency weakened, but it appeared to be an order-driven move rather than central bank action
Markets will, however, also remain on high alert over the possibility of National Bank opposition to rapid franc gains even though there will be expectations that the bank will strongly defend longer-term currency value. |