Sterling Let Down By The Data
January 27th, 2010
UK inflation lively but public sector borrowing and retail sales disappoint. Euro coasts, uninspired and unhindered by the data.
It was a reasonably good week for sterling but it could have been better. From €1.1350 it had added two cents by Wednesday but the following two days were less than helpful. The pound seemed to be heading for €1.1350 in the Far East early this morning but managed to scramble back to €1.14 in time for London’s opening
The UK economic data became steadily less helpful as the week went by. Monday’s Rightmove house price index (which admittedly only surveys the asking price of house, not what people will pay for them) was higher again in January, leaving prices 4.1% higher on the year. Tuesday’s inflation figure was even higher than analysts had expected. At +2.9% in December it was within an inch of the upper limit of its 1%-3% target band. No rate-hike reaction is expected from the Bank of England, which foresaw an inflation spike early in the year but predicted that it would only be temporary.
Wednesday’s unemployment numbers looked alright on the surface, with a fall in the number of dole claimants, but analysts point out that many jobseekers are ignored by the statistics and that one in five of the nation’s kids live in a household where nobody has a job. Thursday’s money supply figures, normally of little interest to the market, showed a disappointing fall (they should be going up). Public sector borrowing was another disappointment, hitting a record £15.7 billion in December. Friday’s retail sales figures were even more of a let-down for sterling. Rather than the +1.1% monthly increase that investors had been expecting, the rise was a considerably more anaemic +0.3%. Annual growth was a percentage point short of target at +2.1%.
Politics is gaining in importance with the general election only 14 weeks away. Two opinion polls published on Sunday helped muddy the waters. The News of the World’s ICM poll gave the Conservatives a 38-seat majority in the Commons while the ComRes survey in the Sunday Mirror indicated a hung parliament with the Tories five seats short of an overall majority. In investors’ opinion a hung parliament would be the worst possible outcome for the pound. The more likely it looks, the less likely they will be to hold onto their sterling.
While the UK data steadily undermined the pound as the week went by, the ecostats from Euroland achieved little. Tuesday’s ZEW survey showed an erosion of economic sentiment in Germany (from 50.4 to 47.2) and Euroland as a whole (from 48.0 to 46.4). The provisional results for the purchasing managers’ indices had manufacturing slightly upbeat and services on the slide. Industrial orders in November almost managed to reverse the previous month’s decline. The Greek economic situation continues to work against the euro but, as they have in the case of sterling, investors pay less attention to old bad news as long as it does not get worse.
After spending the best part three months between €1.09 and €1.13 it looks as though the pound might be in the process of carving out a slightly higher range between €1.13 and €1.16. But do not get carried away, the worries are still there. Buyers of the euro should take advantage of any spikes to hedge 50% of their exposure.
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