The evidence continues to suggest that the economy is stabilising with an improvement in the manufacturing sector. There will also be hopes for a recovery in the housing sector, although optimism could quickly flounder given the underlying debt vulnerability and very high debt levels. Following the credit-rating warning, the UK currency will also remain vulnerable on debt fears. Sterling moves will still be correlated strongly with degrees of risk appetite and selling pressure will be contained if risk confidence remains firmer.
A key feature was Sterling buying support on dips and there were significant gains to 2009 highs near 1.59 against the dollar despite sharp selling pressure at times. The UK currency also secured net gains against the Euro even with a sharp retreat from a peak near the 0.87 level.
The CPI inflation rate fell to 2.3% in April from 2.9% with a -1.2% rate for the RPI as the sharp cuts in interest rates put downward pressure on housing costs. The inflation data was slightly below expectations, although the impact was limited.
The UK corporate earnings data provided some degree of relief while there was also optimism that the government would be in a position to partially sell-off its holdings in the banking sector which helped underpin sentiment.
The Bank of England minutes recorded a 9-0 vote to keep interest rates on hold at 0.50% and to increase the quantitative easing programme by a further GBP50bn. There was a debate as to whether there should be an even more aggressive programme of bond buying which unsettled Sterling to some extent. The latest CBI industrial survey recorded a further very weak reading for the orders component at -56 from -57 the previous month. The output reading was more positive which maintained hopes that the sector is stabilising.
The UK retail sales figures were stronger than expected with a 0.9% monthly increase for April while the increase for the previous month was revised up to 1.1%.
The impact was overshadowed by the Standard & Poor's announcement that the UK credit rating was being put on negative watch due to budget and debt fears. The AAA rating was maintained for now which will helped lessen the impact while other agencies did not suggest that they were considering further action. The underlying budget data also remained weak with a GBP8.5bn borrowing requirement for April following a GBP18.2bn shortfall previously which reinforced market fears over the debt situation.
Swiss franc
The Swiss economy is likely to stage a weak recovery, but the economy will find it difficult to make strong headway. The global debt fears could trigger some defensive support for the Swiss currency. The National Bank will remain very sensitive to franc strength, especially if the currency extends gains against the dollar as well as the Euro. Overall, there is likely to be opposition to currency gains which will limit the potential for franc appreciation.
The Swiss currency was unable to make a serious challenge on levels near 1.50 against the Euro during the week and it weakened towards 1.5150 later in the week. The dollar initially held support close to 1.10 against the franc, but weakened to lows near 1.09 after the US currency suffered widespread losses.
The Swiss ZEW business confidence index strengthened to -3.9 in April from -27.7 the previous month which was a two-year high for the index.
Markets remained extremely sensitive to the issue of potential intervention after the reported franc selling seen last Friday. |