Foreign Exchange - UK Weekly Update - Monday, March 11, 2013 15:50 - 0 Comments

BOE resists pulling the trigger yet pound remains unloved

With recent Bank of England decisions disappointing proponents of further monetary easing, many economists suspected that last week would be the time when the MPC decided it was time to fire up the printers and release £25bn or so into the economy, via an extension of the asset purchase facility (QE). They were mistaken, and the increase did not pan out.

However, the same could not be said for the rumours of an Italian ratings downgrade which pushed GBPEUR higher on Monday, and eventually materialised in the form of a downgrade by Fitch on Friday afternoon. With Draghi shoring up confidence everytime the euro throws a wobbly, Germany is the sole country churning out encouraging economic signals from the Eurozone. With this in the foreground, and US jobs data fuelling dollar strength, sterling has fallen out of favour with investors who are concerned by stagnant economic fundamentals and political indecision at home. More QE is now assumedly on hold until after Carney’s arrival on Threadneedle Street in July, but there will likely be plenty to sate the appetites of sterling bears before then.

Interpreting or anticipating economic data releases is an imperfect science and the contrasting UK PMI data releases at the start of last week proved as much. The abysmal construction PMI reading posted the previous week was confirmed by Monday’s number but this did not stop sterling’s steady climb. The better-than-expected services index was then met with antipathy by the market on Tuesday, as sterling scrambled for a few extra pips. Admittedly, these releases were not published in a vacuum and the good German services PMI stole some of the pound’s thunder. Save for a blip on Thursday following the Bank of England decisions, sterling found itself sliding against the dollar and euro.

To dismiss the impact of the central bank’s decision as a blip may be trivialising it a little, but the real test for the pound will occur when the minutes are published in the coming weeks and the split on QE ‘yays’ versus ‘nays’ is known.

The ECB also stuck to the script by holding the base rate of interest last week, however the euro benefited from Mario Draghi’s subsequent press conference, where he delivered his typically upbeat post-game analysis and stated that the ECB would maintain its accommodative monetary policy stance. If we are beginning another crisis cycle in the Eurozone (along the lines of Robert Feldman’s 2001 analysis of Japan), of which the Italian elections mark the beginning, nobody has apparently informed the ECB president judging by his tone.

While we may be continually (and rightfully) engrossed in recent European developments, the political uncertainty in the US surrounding spending cuts and tax rises due this year could spell future dollar weakness. Despite such issues, the dollar pushed sterling comfortably below the key level of 1.50 on Friday afternoon following the publication of the Non-Farm Payroll number of a 236K increase for February, which continued the strong run of form the US jobs market has shown lately. The unemployment rate unexpectedly dropped to 7.7%, as cable smashed through support at 1.4985, finally coming to a halt around the mid-1.49s by the end of Friday.

This week leaves us with little in the way of big data releases to mull over. Besides German CPI releases on Tuesday (watched for an indication of the robustness of domestic demand and inflationary pressures) with European and US CPI on Friday, we have US retail sales on Wednesday, followed by US jobless claims and US Producer Price Indices on Thursday.

Have a great week.