In this week’s Dollar update by Moneycorp:
Bank of England still gloomy about the outlook. Britain falls behind in the economic stakes. Dollar’s safe-haven status still worth something.
Last Monday’s $1.6650 opening price was the high of the week for sterling. Twice it had a look at $1.64 before returning to its starting point. On Thursday it set off lower again, a move which saw it open in London this morning at $1.6350 looking unloved.
UK housing market statistics were both a blessing and a curse for sterling. The Royal Institution of Chartered Surveyors’ house price balance on Tuesday morning came in at -8.1, ten points better than the previous month’s -18.1. It was not a good figure but at least it was an appreciable improvement. Sunday night’s report from property website Rightmove was a different matter. Asking prices on the website fell by -2.2% between July and August. It was absolutely not a positive sign for Britain’s economy or the British pound, even though the huge 43% gap between Rightmove’s asking prices (£228k in July) and actual transactions recorded by the Nationwide and the Halifax (average £159k for the same month) call into question the relevance of Rightmove’s data.
Sterling got another smack in the teeth on Wednesday from the Bank of England’s Quarterly Inflation Report, a publication by which investors set great store, and from the Governor’s introductory comments. Lest anyone be unduly optimistic, Dr King opened up with the warning that “The world economy remains in a deep recession and its financial system in a fragile condition.” As for the British economy, recovery could be “slow and protracted”. The immediate impact was muted but the sentiment festered in investors’ minds.
The situation was not helped by news that other economies were pulling out of recession while the UK economy continued to contract in the second quarter of the year. As previously reported, Britain’s Gross Domestic Product shrank by -0.8% in Q2. Several competitors have reported better figures for the period, including the States, Euroland, Germany, France and Japan – to name but five.
The dollar’s unusually positive reaction to the US employment numbers ten days ago set the tone for what was ultimately a confusing week for the US currency. As each economic statistic emerged there was a sort of will-we-won’t-we debate as to whether it was good or bad for the dollar. The seasonally thin market did not help at all. Any particular move could have been either the distillation of investor sentiment or the result of one big bank having a punt in the hope of short-term profit. The risk-appetite/risk-aversion angle was still there but it became increasingly difficult to follow the logic.
The confusion extended to the Federal Reserve’s statement on Wednesday that it would maintain its key policy rate close to zero for “an extended period”. Investors eventually decided they liked the bit where the Fed anticipated “a gradual resumption of sustainable economic growth” but they struggled to interpret what that might mean for the dollar.
Then, on Friday, everybody seemed to come to the conclusion that the old ways were the best. The University of Michigan survey of consumer sentiment has a recent history of moving the dollar and Friday’s announcement was no exception. Having spent the day going nowhere fast the dollar was faced with a consumer confidence index of 63.2, three points lower than the previous month and six points worse than expected. Investors did not sell the dollar because the development made them less optimistic about the American economy itself, they bought it because it made them less relaxed about global economic risk. At least, that was the only inference to draw.
Having retreated from its highs the pound is looking nervous again. The $1.63 target that we looked at a week ago is already within easy range. If that gives way, the next stop is likely to be at $1.60. Anywhere below that and it will be time to worry about $1.57 again. Buyers of the dollar should consider increasing their hedge to 75% of their requirement.
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