Euro Weekly Update: July 29th 2009
July 29th, 2009
Investors are still nervous about sterling after Britain’s economy shrank by more than expected in the second quarter of the year. The pound and euro are both slightly higher against US dollar.
From last Monday morning’s €1.16 the pound made no net progress on the week, opening just short of €1.16 this morning in London. The low came on Wednesday at €1.15 and Thursday night’s high was just above €1.1650.
The FX market was not alone in feeling the stultifying effects of the summer slowdown. Price movements were either dampened by lack of interest or intensified by lack of liquidity. Sterling did not have a particularly easy run.
The week began with news that Treasury revenues fell by more than £30 billion in the last tax year. Expenditure had clearly gone up so investors were left to fret about what the government was going to do about the mismatch.
Wednesday’s Monetary Policy Committee’s minutes failed to provide sterling bears with any ammunition. There was no hint that the Bank of England would extend its Asset Purchase scheme – “printing money” as some would have it – beyond the £150 billion already earmarked. Even the last £25 billion of that is not yet committed to the programme.
That revelation was good for sterling, as was the following day’s retail sales figure for June. Sales were up by 1.2% on the month and 3% higher than a year earlier. It was a different story on Friday, however.
Every three months the Office of National Statistics correlates all the available information to see how the British economy as a whole has performed. For the first three months of the year investors already knew that Gross Domestic Product shrank by -2.4%.
They were expecting the first estimate of second quarter GDP (it will be revised a couple of times before the final figure) to show a much smaller -0.3% contraction. What they got was a -0.8% shrinkage, more than twice the forecast decline. Not surprisingly, sterling took a hit.
The euro and the pound both gained a little ground against the US dollar but neither showed any sense of purpose, changing direction on average at least twice a day.
Euroland’s economy had little to say for itself beyond an increase in German business confidence and broadly-based improvements in national and Euro zone Purchasing Managers’ Indices. This is not to dismiss those improvements, rather to underline a general shortage of hard-core economic data from the region.
Although the pound again failed to consolidate above €1.16 the support level at €1.15 looks reasonably comfortable. Nearly all sterling’s work in the last three weeks has been done between €1.15 and €1.17.
Close to the middle of that range again this morning there is no reason to look for a breakout in either direction. Buyers of the euro should hedge half their requirement and wait to see what happens.
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