UK industrial production rises in April. G8 endorses dollar as reserve currency.
Sterling bounced off technical support at $1.58 on Monday morning and was five points higher the following day. Hesitation on Wednesday gave way to commitment on Thursday and sterling eventually peaked at $1.66. After gaining eight cents in four days the Friday sell-off was not a complete surprise. By the time London opened this morning sterling was trading at $1.6350.
A much-reduced flow of UK economic data did no harm to sterling. The figures were a long way from perfect but they were an improvement over what had gone before. Even more important, they were generally better (or less worse) than anything the opposition could produce. The Royal Institution of Chartered Surveyors and the government both saw a slowdown in the falling price of real estate. The best news of all came with the manufacturing and industrial production data for April. Both were up on the month. Industrial production rose by 0.2%, slowing the annual rate of decline from 13.1% to 12.7%.
The National Institute for Economic and Social Research estimated that Britain’s economy grew by about 0.2% in April and 0.1% in May. If this month goes well, and if the third quarter remains positive, it will mean the end of recession as we know it. The Confederation of British Industry agrees that things are on the turn. It believes the slowdown is over but also thinks it will take a long time for the recovery to become noticeable. As The Independent summed it up; “Economy bottoms out but growth must wait, says CBI”.
Data from the States were hardly more forthcoming. The only numbers that really mattered were the retail sales figures for May. Sales were up by 0.5% and automobile sales went up by a similar proportion. Shortly after the retail sales figures came out the dollar began to recover a third of the previous four days’ losses but it was by no means certain that one led to the other.
At the G8 meeting the finance ministers of Japan and Russia both declared their support for the dollar as a reserve currency. Japan’s confidence in the dollar is “unshakeable”. Russia thinks it is “in good shape”. The endorsements will not bring dollar buyers flocking but it might discourage the sellers.
The main focus this week will be on the consumer price index data. The numbers will have no immediate bearing on interest rates but the market has a traditional interest in inflation statistics.
Having held firm last Monday the technical support at $1.58 looks even more solid than it did before. Unfortunately, the resistance at $1.67 look equally rigid. The break when it comes is more likely to be upward than downward but that does not remove the need for protecting the downside. Buyers of the dollar should place a stop order somewhere south of $1.58 and be patient. The cautious strategy is still to buy now half the dollars you will need but if you feel comfortable leaving a larger percentage uncovered in anticipation of a proper rally.
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