UK data give no cause for new concern. Bank of England cautious about recovery. Negative inflation in the States.
A reasonably eventful but ultimately fruitless week saw sterling slip from $1.52 to $1.5150. A modest $1.5050-$1.5350 range was explored at tedious length but investors could come to no useful conclusion. When London opened this morning the pound was looking a little more perky but showed no sign of expanding its range.
A potentially upbeat start to Sterling’s week came with a report from the Organisation for Economic Co-operation and Development. This members-only club announced that Britain was one of only a handful of countries that would soon see a turnaround – or at least a bottom – in their economic performance. France, Italy and China were also on the list while the US, Japan and Germany faced further “sharp falls” in output.
Britain’s residential housing sector delivered unusually good news on three sides. The Royal Institute of Chartered Surveyors’ House Price Balance improved by a dozen points to -60%; nowhere near good but a lot better than in previous months. The Council of Mortgage Lenders said mortgage approvals had risen by 29% in March. Although the number was still a third less than a year earlier it was a welcome increase. This morning the Rightmove property website reported a 2.4% rise in sellers’ asking prices. Asking prices are very different from selling prices but the upswing in sellers’ optimism was seen as a plus for the UK economy.
Negatives for sterling came with another rise in unemployment, this time to 7.1%, and a realistic assessment of the economy from Bank of England Governor Mervyn King. He said the economy would rebound and that it might take a while to get back to trend growth. Nothing obviously wrong with that. He said that it was impossible to predict how long it would take for the banks to resume full-scale lending activities. Also true. However, the market chose to focus on Dr King’s refusal to commit to untrammelled expansion from here on in. That sentiment weighed on sterling for the rest of the week.
The US dollar had a funny old week. Investors were blowing hot and cold about whether they wanted to take risks or stay safe. Even the dollar’s status as a safe-haven came into question (again). Investors have become more comfortable with the notion that the big US banks are not going bust. Therefore, the previously rigid connection between confidence in the banking system and confidence in equities and other higher-risk investments has started to become unglued. No longer is it the case that nervousness automatically forces the dollar higher. The reason for that nervousness is now also important.
The dollar received little help from the US ecostats. Retail sales continued south in April. Weekly jobless figures worsened. What could have been a killer blow on Friday – but wasn’t – was a CPI inflation figure of -0.7%. You cannot call it deflation yet, because the track record is so short, but that is where the numbers are pointing.
As long as sterling hangs in there above $1.51 there is no reason to panic. Buyers of the dollar should place a stop order at an appropriate level above $1.50 and bide their time.
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