Weak data and unhelpful news held sterling back. The US economy’s negative performance in Q4 was exactly in line with Britain and Euroland. Look for a UK interest rate cut on Thursday.
It was a roundabouts week for sterling. The pound handed back the three and a half cents it had gained the previous week. Once again the support above $1.41 held good and when London opened this morning sterling was trading at $1.42, unchanged from a fortnight ago.
It was a scrappy week for the pound. The economic statistics were not bad enough to do serious damage but bad enough to get in the way. It was the same with non-data economic news; nothing totally nasty but nothing good either. The CBI’s distributive trades survey damned with faint praise: Having been expected to worsen from -47 to -52 it improved to -25, not exactly a miracle recovery. The first revision to fourth quarter Gross Domestic Product left the economic shrinkage unchanged at -1.5%, in line with the Euro zone’s as yet unrevised performance. However, sterling’s critics pointed to the downward revisions to earlier periods. News from Nationwide and Hometrack confirmed – as if it were necessary – that house prices are still falling.
As for the non-data news David Blanchflower, the MPC’s Ã¼ber-dove, said the UK economy was “in dire straits”. With investors in profit-taking mode at the time he provided support for any selling decision. Another argument for sending the pound lower came from the European Commission. In a document prepared in January officials expressed concern that the pound’s “very rapid” drop “raises questions about the financial stability of the British economy.” Kate Barker, Mr Blanchflower’s MPC colleague, wrote in the Northern Echo that “growth may not resume until towards the end of this year.” Her words of caution came as a disappointment to those who thought it would resume next Tuesday.
In the States the first four days of the week were punctuated by weak data and positive rescues. Figures for Case/Shiller metropolitan house prices, consumer confidence, Federal Reserve manufacturing indices, existing home sales, durable goods orders and new home sales were all lower, surprising nobody. The only figure that went up was that for continuing jobless claims; a record at above 5 million. Friday’s figure for fourth quarter 2008 GDP contraction was exactly in line with Britain and the Euro zone at -1.5%. It was worse than expected and consequently bad for the dollar.
President Obama’s up-and-at-’em speech on Tuesday was positive for the dollar, as seems to be almost his every utterance. The injection of capital into Citigroup and AIG was not greatly helpful to equity markets but it did help the currency. Nervous investors ploughed their spare cash into the dollar on Friday, hoping for a safe haven for their money over the weekend.
The outlook remains unchanged from last week. Analysts are divided about the future of exchange rates and each camp has its own, equally valid, arguments. Sterling has gone nowhere in the last three months and its frequent ten-cent excursions make people nervous. Thursday’s meeting of the Monetary Policy Committee makes them more nervous still. Buyers of the dollar should hedge half of their requirement, leaving the remainder uncovered in anticipation of better levels in the future. Use a stop order to protect the downside in case of unexpected alarms.
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