UK industrial production disappoints investors. IMF upgrades economic forecast for Britain but not by much. US trade deficit at its narrowest in ten years but consumer confidence falls.
It was not at all easy to read the direction of sterling last week because it changed so often. After an initial dip from $1.6150 sterling jumped to $1.63 and dumped to $1.60. After bottoming on Wednesday it shot up to $1.64 before falling back yet again. It paused for the weekend at $1.62 and set off lower again this morning. By the time London opened it was trading at $1.61 and looking shaky.
Sterling was looking reasonably comfortable until Tuesday morning when the industrial and manufacturing production data for May were announced. It was a similar story to what happened with the first quarter GDP numbers a week earlier. Investors became too optimistic about what the figures would show. For the second time running an important economic measure – industrial production this time – was a disappointment. The market had been looking for a second small improvement, something like 0.2%. What it got was a -0.6% fall.
The Halifax provided another reminder of recession with a -0.5% fall for its house price index in June. Even though the annual decline slowed from -16.3% to -15.0% it was not helpful to sterling.
Not that the week was entirely without good news. For long enough the IMF took a gloomy line on the UK economy. Its previous estimate, in April, was of a -0.4% GDP contraction next year. On Wednesday it revised its forecast to +0.2%. The upgrade is hardly reason for rejoicing but it does represent a positive shift from downbeat to feeble. Britain’s trade deficit was another positive surprise when it narrowed in May to its smallest in three years. More help came from the Bank of England after Thursday’s Monetary Policy Meeting. The bank announced it would not extend the Asset Purchase Facility which, to date, has spent £100 million on buying bonds. It might be a different story after next month’s meeting but, for the time being, investors are pleased to see a pause in the potentially inflationary programme.
The dollar had a busy but eventually fruitless week, going nowhere in particular against the euro or the pound and losing ground to the yen. As much as anything its gyrations were the product of changing appetites to risk. US economic data were in short supply and most of those that did appear were second division statistics. The belated manufacturing Purchasing Managers’ Index improved by three points to 47. It was a good enough result but not strong enough to change investors’ minds.
Perhaps the best figure of the week was Friday’s balance of trade for May. It was still a deficit of $26 billion but it was the best result for ten years. It was a pity, then, that 90 minutes later the provisional Michigan survey of consumer sentiment showed a six point fall to 64.6. Investors had been looking for an improvement, not a fall, so they were not impressed.
Having held firm five weeks ago the technical support at $1.58 should still be solid but is getting a little too close for comfort. The resistance at $1.67 is irrelevant with the market in its current mood. Buyers of the dollar should place a stop order somewhere south of $1.58 and be patient. The cautious strategy, as ever, is to buy now half the dollars you will need. If you feel comfortable in doing so, leave a larger percentage uncovered in anticipation of a renewed rally but do not forget that stop order.
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