Monetary policy continues to relax. UK purchasing managers are more upbeat than most. US banks are not going bust just yet.
Sterling made mincemeat of the supposed technical support/resistance points at $1.50 and $1.5050, crossing each of them about five times over the course of the week. The low came on Thursday night at $1.4950 and Friday evening’s $1.5250 high was not far behind. Sterling opened in London this morning just short of $1.52.
For financial markets in general the week was typified by a further relaxation of monetary policy and an improvement in investor sentiment. Although it was not a matter of cause and effect the two did go hand in hand. Central banks in Norway, Iceland, the Czech republic, Britain and Euroland were among those who either lowered policy interest rates or extended the scope of their quantitative easing. Equity markets were mostly upbeat, a mood underwritten by the results of the “stress tests” that the US Treasury had insisted be undertaken by America’s biggest banks.
Hard economic data were relatively few and far between, even from those economies that usually churn them out by the dozen. In Britain’s case the two that mattered were came from the Nationwide building society and the Chartered Institute of Purchasing and Supply. Nationwide reported a rise in its index of consumer confidence. The April reading went up from 42 to 50, the largest monthly rise in nearly two years. It did not exactly represent an outburst of exuberance among consumers: The index would have to almost double from its present level before the nation could be labelled “optimistic” but it was a worthwhile improvement nevertheless.
The CIPS’s services sector Purchasing Managers’ Index, similarly, was not good enough to be described as positive but it was better than most of the opposition. The headline figure went up three points to 48.7, eclipsing comparable measures from the United States (43.7), Germany (43.8), France (46.5), Italy (42.0) and the Euro zone as a whole (43.8). One should not get carried away with a figure that is still negative – below the 50.0 breakeven level – but it is clear that things are getting worse much more slowly.
The Bank of England’s decision to dip into its kitty to buy more gilts was not helpful to the pound. The government initially approved a pot of £150 billion for the Bank to spend on supporting the gilt market. The first £75 billion will be exhausted next month. When the Bank let it be known that it would spend a further £50 billion on buying gilts the market did not like the idea. The background suspicion is that the gilts bought by the Old Lady will never again see the light of day; in other words, that the government is printing money to lend to itself.
The problems for the dollar came towards the end of the week, courtesy of that stress test programme. The Treasury had ordered the 19 biggest US banks to see how they would stand up to a worst-case depression scenario. Did they have enough capital to survive or would they crumble for lack of funds? The results that came out at the end of the week indicated that, together, the banks would need an extra $77 billion. It was a big number but not at all unmanageable in light of the squillions that are being spent elsewhere to restart the US economy.
Friday’s monthly (un)employment report was not as bad as feared either. After 699,000 job losses in March the market was geared up for another 600,000 to have gone down the Swannee in April. In the event “only” 539k jobs were lost. It was a result of sorts and might have helped the dollar had the market not been more concerned with the results of the stress tests: Because banks were not about to collapse they felt less need to park their cash in the safe-haven dollar.
For the moment it looks as though the pound has been able to establish itself above $1.50. $1.5250 has become the new $1.5050 and fresh overhead resistance is not far away at $1.54 and $1.57. Buyers of the dollar should place a stop order at an appropriate level above $1.50 and bide their time.
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