Bank of England 2 – Sterling 0
March 25th, 2010
MPC members raise spectre of double-dip recession. Brussels and Berlin agree to disagree over Greece.
Sterling made hard work of adding the half cent between €1.10 and €1.1050 last week. An initial half-cent loss was followed by an upward ratchet to €1.12, reached on Thursday. Friday brought a one-cent sell-off to €1.11 and the pound was a half cent lower by the time London opened this morning.
Monetary Policy Committee member Kate Barker was talking to her local paper last weekend. She told the Western Morning News that ‘it’s possible we will have a quarter when GDP falls but I don’t think it will be a double-dip [recession]‘. Investors read about it on Monday’s newswires.
They looked again at the possibility of an indecisive general election. They put two and two together and sold sterling. By the end of the week investors had been treated to a spooky déjà-vu when Ms Barker’s fellow MPC member, Andrew Sentance, went down the same track.
On Thursday he had said in a speech that said ‘we should expect to see some variability in growth rates, both at home and abroad.’ Had he left it at that, all would have been well but he went on to tell CNBC that ‘you have to recognise there is some risk of a double dip but that’s not the central forecast.’
Investors couldn’t care less about the Bank’s central forecast; they had heard two MPC members talking about double-dip recession in the space of five days and it made them nervous about the UK economy.
They were marginally less nervous about the medium term outlook for Britain’s indebtedness after government spokespeople queued round the block to backtrack on the Treasury Secretary’s promise that taxes would not go up after the election. They will be going up after all, it transpires, and they will be going up even before that in the chancellor’s budget this week.
In the run-up to his speech the chancellor got a couple of lucky hits from the economic data last week (or at least sterling came in for some good fortune). Investors opted not to punish sterling for the loss of 54,000 British jobs in three months.
Instead they praised it for the 32,300 fewer new jobless claims in January than in the same month last year. By the same token they looked upon February’s £12.4 billion public sector net borrowing figure not as a heck-of-a-lot of money but as an improvement on the £14.4 billion they has been expecting. A genuine bonus among the data was the £4 billion downward revision of January’s borrowing.
Employment and consumer price data from Euroland were tolerable, if not quite brilliant. The number of people in work in the euro zone fell by -0.2% in the fourth quarter and was -1.8% down on the year but the figures were better than analysts had feared.
Inflation was a notch lower in February, +0.9% instead of +1.0%, but prices were +0.3% higher on the month. Surveys of economic sentiment in Germany and Euroland both registered slippage in March. In Germany the fall was from 45.4 to 44.5; in the euro zone the measure went down from 40.2 to 37.9.
More than the nitty-gritty of economic data, investors were transfixed by the artillery duel going on between Brussels and Berlin. The EU Commission (and Mr Papandreou in Athens) would dearly love to see a euro-centric bailout to help Greece through its temporary local deficit difficulty.
They keep arranging meetings to put rescue packages together and they keep failing to do so. From German Chancellor Merkel’s point of view; ‘Das its mein Geld’. As far as she is concerned, Athens has more chance of getting the Greeks to pay income tax than it does of receiving a handout from Germany. Let them eat moussaka. Another non-agreement is due this week. After that, who knows?
Since the beginning of the month sterling/euro has changed direction a dozen times and has gone nowhere. Buyers of the euro should hedge 50% of what they will need. If the money is required in the near future they should consider covering the whole amount.
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