Foreign Exchange - UK Weekly Update - Monday, November 12, 2012 15:26 - 0 Comments

Sterling Update: Focus returns to the UK recovery

Last week was all about the US. President Obama’s landmark re-election cleared up any uncertainty surrounding precisely which candidate was going to be left to tackle the key economic issue of the winter, what to do about the ‘Fiscal Cliff’.

The rest of the world now knows who will be leading inter-governmental efforts to prevent the US economy (and the majority of the Western world’s economies) falling from a great height, however it’s less clear how he will try and do it.
There has been much talk of ‘reaching across the aisle’ with both Democrats and Republicans making all the right noises about working together to tackle this problem, everyone else is hoping that it’s more than just empty rhetoric.

The future of sterling, along with most of the rest of the world’s currencies, will be directly influenced by the outcome of events in the US. However there are key domestic issues to consider first.

There was plenty of talk about poor UK data last week, and this has undone all of the promise attached to the positive Q3 figures we received the week before that.  That 1% growth figure has been widely downplayed since, and the UK Industrial Production figure of -1.7% during September, down -2.6% on last year, consolidated this sentiment. GBR EUR slipped below the 1.25 barrier as a result, and everyone was back to looking ahead nervously once more.

The inflation figures announcement, on Tuesday, now becomes even more crucial for Britain’s economic confidence.
Last week the BoE decided not to take any decisive action on interest rates or QE, which only served to increase the expectation that they would be doing something on asset purchases next month. An increase in inflation on Tuesday would remove that option for the BoE as QE in the face of inflation is economic suicide.

Inflation is expected to drop for the month so everything should be ok. However, any surprise increase would see control stripped from the BoE and it would spark short term panic and prompt further GBP weakness. The Bank is up against it already, as last week’s figures demonstrate, the last thing they need is any further data causing restriction on decision making flexibility.

Following inflation, we have retail sales numbers coming out on Wednesday, which, again, are expected to fall from last month – the consensus is a 0.3% number for Oct vs 0.5% Sept.

There’s plenty to keep a close eye on this week