The Bank of England strategy will continue to unsettle Sterling in the short term, especially with the bank governor pushing for an even more aggressive programme of bond buying at the August meeting. There will also be increased fears over the government debt situation if the economic recovery seems to be stalling. Trends in risk appetite will also be important with Sterling much more vulnerable to selling pressure if there is a sustained deterioration in risk appetite. Overall, the UK currency is likely to remain vulnerable to selling pressure Sterling was subjected to sharp selling pressure at times, but was able to resist heavy losses for the week as a whole with some buying support below 1.64 against the US dollar. Trends in risk appetite continued to have an important influence as selling pressure on Sterling intensified when equity markets fell sharply. In contrast, the recovery in risk appetite helped the UK currency rally
The retail sales data was marginally stronger than expected with a 0.4% monthly increase for July after a revised 1.3% increase the previous month. The Rightmove index recorded a 2.2% decline in house prices for August, breaking the recent run of favourable economic data, although the series can be prone to seasonal volatility.
The government borrowing data was substantially worse than expected with a GBP8.0bn monthly deficit for July. For the first 4 months of the fiscal year, the borrowing requirement rose to GBP49.8bn from GBP15.8bn. The borrowing data will reinforce underlying fears over the debt position and will provide a stern test of market confidence in the UK economy and currency.
The latest consumer inflation data was higher than expected with the annual rate unchanged at 1.8% compared with expectations of a decline to 1.5% while there was a 1.4% annual decline in the RPI index with housing costs still showing a substantial annual decline. The higher than expected inflation rate initially dampened expectations of more aggressive Bank of England monetary policies.
The Bank of England minutes recorded a 9-0 vote for unchanged interest rates at the August policy meeting. There was a 6-3 vote in favour of the GBP50bn expansion of the quantitative easing. The dissenters wanted a larger GBP75bn increase in the programme, in contrast to expectations that members voting against were more likely to want a pause in the bond buying scheme. The pressure for a more aggressive quantitative policy undermined Sterling.
Swiss franc:
The National Bank policies will remain extremely important in the short-term and the bank’s statements continue to suggest strongly that there will be intervention to prevent significant appreciation, especially against the Euro. The Swiss currency will still tend to gain some defensive support when risk appetite deteriorates. Nevertheless, the overall risk profile suggest that any franc gains will not be sustainable. The dollar was unable to sustain a move above 1.08 against the Swiss franc during the week and weakened back towards 1.06 later in the week on wider losses for the currency. The franc moved stronger against the Euro.
There was a recorded 0.9% annual increase in retail sales for June following a 1.4% decline the previous month. The trade account remained in comfortable surplus for July with a recovery in exports providing some underlying support to economic confidence. The ZEW business confidence index also strengthened to a 3-year high according to the latest survey.
Swiss National Bank member Jordan stated that bank would not tolerate a rise in the franc against the Euro and that the bank will maintain the policy of unconventional easing in the short term.
Jordan’s comments were particularly blunt for a central bank official as pledged that the franc would not be allowed to strengthen through the 1.50 level against the Euro. Markets, therefore, remained on high alert for further intervention by the bank |