Euro Weekly Update: August 25th 2009
August 25th, 2009
MPC minutes raise spectre of further quantitative easing. UK public borrowing much higher than expected in July. Appreciable improvement in Euroland PMIs.
Having looked queasy on the wrong side of €1.16 when London got going on Monday the pound soon found its feet. By the end of the following day it had reached €1.1750. That was the extend of its achievements; the pound was back down to €1.16 on Wednesday and it extended its losses on Thursday and Friday. By the time London opened this morning it was testing support at €1.15.
Although there were very few UK economic statistics and events on last week’s agenda, three of them turned out to be quite significant. Tuesday’s Consumer Price Index data delivered the first surprise. With inflation fading over the past several months a further decline was expected, from +1.8% to +1.6%.
It turned out that prices had remained static between June and July, leaving the annual rate of inflation unchanged at +1.8%, still close to its 2% target. There were raised eyebrows all round and the market’s instant reaction was to buy the pound: if inflation was not still going down could this mean that interest rates might have to go up?
The following day’s minutes of the August Monetary Policy Committee meeting had the opposite effect. Investors had already been taken aback by the committee’s decision earlier this to increase by £50 billion the size of its Asset Purchase Facility (quantitative easing, “printing money”).
When they saw in the minutes that the Governor himself had been outvoted in an attempt to increase the programme by an even larger amount – £75 billion – they took a dim view.
The Bank of England has confused financial markets with its stop-start signals about monetary easing and markets do not like to be confused, especially by central banks.
The third bouncer came with Thursday’s money supply figures. July is normally a good month for the Treasury, with tax receipts exceeding public spending. Expectations were lower than usual because of the recession, but investors were not ready for the £8 billion jump in public sector net borrowing that suddenly confronted them.
Everyone knows that the government is planning to borrow in the next few months as much as previous governments have borrowed in total, ever. Given that, it is not immediately obvious why everyone was so surprised but they certainly were surprised, and unpleasantly so. It made for a most uncomfortable end to the week for sterling.
It was another week of quiet aimlessness for the euro, which profited from sterling’s (and the US dollar’s) woes rather than making the running itself. The economic data from the euro zone were generally non-committal; even those that managed to attract attention did so without making any waves. An improvement in German economic sentiment failed to send the euro higher and falling German producer prices did not make it retreat.
The only data that made any real difference were Friday’s Purchasing Managers’ Indices for Germany and the euro zone. The figures for the services and manufacturing sector were all ahead of expectations.
The German services PMI was well into the well into the expansion zone at 54.1 and the Euroland figure was not far short of neutral at 49.5. The euro responded positively.
Having bounced off the €1.15 level this morning sterling is still on the right side of an important technical level. The risk remains that a downward break would set things up for another two or three cents of downside.
Although a more substantial rally is possible there is still no sensation that investors are looking for reasons to be positive about the pound. Buyers of the euro should think twice before leaving their exposure unhedged.
Get the best foreign exchange rates with no bank fees or commission charges using your Moneycorp Privilege Card
Related Posts
- Euro Weekly Update: August 12th 2009
- Euro Weekly Update: August 19th 2009
- Euro Weekly Update: August 4th 2009
