Moneycorp: Sterling's Rise Looking Shaky
April 22nd, 2009
Politicians and commentators find reasons to be less gloomy. Even so, this week could be tricky for sterling.
Sterling extended its uptrend for a third week, adding two more cents before topping out a little above €1.1350. After the failure of five attempts to break higher the pound retreated on Friday. When London opened this morning it was trading at €1.13 and looking nervous.
On both sides of the Atlantic there have been murmurs that the end of the economic downturn may be nigh. Politicians have studiously avoided any mention of the “green shoots” that inspire such derision among cynics, and the word “tentative” is ubiquitous, but there seems to be a spreading belief that the bottom of the recession will come this year, followed by a return to slow but positive growth in 2010.
President Obama spoke of “signs of economic progress”. Federal Reserve Chairman Ben Bernanke saw “tentative signs that the sharp decline in economic activity may be slowing.” The Royal Bank of Scotland’s survey of purchasing managers showed “further evidence that the worst of the downturn… may now be behind us.” Morgan Stanley economist David Miles, the chap who will replace David Blanchflower on the Monetary Policy Committee, was “guardedly optimistic” about the economy when he wrote about it in the Western Mail. The Confederation of British Industry says “there are a few tentative signs that the steepest phase of the recession is now behind us.”
Although they have been in short supply during the last couple of weeks the UK economic data can be used to support this understated optimism, as long as only the better ones are selected. In Britain the RICS house price balance improved for the first time in months. Rightmove’s house price index went up by 1.8% in April (admittedly it does not tell the whole story because it relates only to asking prices).
Euroland’s data profile was not quite as low as the UK but there too the numbers were scarce. Inflation was confirmed at +0.6% in the year to March, the headline number having been dragged down by lower food and energy prices. Core prices rose by 1.5% in the year, not enough to dampen the European Central Bank’s appetite for another rate cut next month. Industrial production fell by 2.3% in February, down 18.4% on the year. The figures compared unfavourably with equivalent falls of 1% and 12.5% for the UK but investors decided against making a big deal of it.
The media pounced on the possibility of boardroom tiff at the European Central Bank. On Wednesday Bundesbank President Axel Weber told journalists that euro interest rates should not be taken below 1%. ECB President Jean-Claude Trichet dismissed that view in Tokyo 36 hours later, saying “central banks must do all they can to restore, preserve and foster confidence among households and corporations in order to pave the way for sustainable prosperity.” Analysts inferred that he was open to the idea of euro rates falling beyond the 1% they are expected to hit next month and the euro briefly came under pressure.
The week ahead could be a tricky one for the pound. On the agenda, among other things, are inflation, unemployment, first quarter GDP and the Chancellor’s austerity budget. None of them is loaded with promise. Nor is the technical picture looking terribly clever for sterling/euro.
The three-week uptrend is vulnerable and a correction looks possible. At this stage it does not look terribly dangerous but we could well see the pound lower at this time next week. Buyers of the euro with a short time horizon should increase their hedge beyond the usual 50% or be prepared to live with a pound two or three cents lower in the next few days.
Story from Moneycorp
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