Second Quarter GDP Hobbles Sterling

By Moneycorp
Investors are still nervous about sterling but they are even more nervous about the dollar. Britain’s economy shrank by more than expected in the second quarter of the year.

Starting from $1.64 last Monday sterling added a cent and a half, lost two and a half cents, regained them and lost them again. This morning it picked up enough ground to open at $1.65, a net cent higher on the week.

The FX market was not alone in feeling the stultifying effects of the summer slowdown. Price movements were either dampened by lack of interest or intensified by lack of liquidity. Sterling did not have a particularly easy run. The week began with news that Treasury revenues fell by more than £30 billion in the last tax year. Expenditure had clearly gone up so investors were left to fret about what the government was going to do about the mismatch.

Wednesday’s Monetary Policy Committee’s minutes failed to provide sterling bears with any ammunition. There was no hint that the Bank of England would extend its Asset Purchase scheme – “printing money” as some would have it – beyond the £150 billion already earmarked. Even the last £25 billion of that is not yet committed to the programme.

That revelation was good for sterling, as was the following day’s retail sales figure for June. Sales were up by 1.2% on the month and 3% higher than a year earlier. It was a different story on Friday, however. Every three months the Office of National Statistics correlates all the available information to see how the British economy as a whole has performed. For the first three months of the year investors already knew that Gross Domestic Product shrank by -2.4%. They were expecting the first estimate of second quarter GDP (it will be revised a couple of times before the final figure) to show a much smaller -0.3% contraction. What they got was a -0.8% shrinkage, more than twice the forecast decline. Not surprisingly, sterling took a hit.

The dollar was all over the place. Every investor has a different opinion about where the Greenback should eventually go. In the meantime they try to go with the flow. Last week’s data were sufficiently confusing to change the dollar’s direction at least twice a day, on average. As usual it was the confidence/nervousness trade-off that exerted most of the pressure but the US economic data did not help.

There were not many of them and none was a guaranteed market-mover. Thursday was perhaps the most interesting day, with better than expected figures for existing home sales and weekly jobless claims.

Having held firm seven weeks ago the technical support at $1.58 should still be solid but is another cent further away than it was at the beginning of last week. The resistance that capped sterling at $1.67 a month ago is now the one to watch. 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.

For more information and expert guidance on the currency markets, call Moneycorp today on +44 (0)20 7589 3000, don’t foreget to mention INTERNATIONAL HORIZONS to secure the best rate. Alternatively go to the Moneycorp Website where you can open a free, no obligation Trading Facility.

Make your money go further!

Get the best Dollar rate of exchange

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s