Britain’s Economy Shrinks By Less Than Expected

In this week’s Moneycorp Dollar update:
Sterling suffers less than it might have done after upward revision to Q2 GDP. Prospect of economic recovery hampers the dollar

Having been three cents down at mid-week the pound did well to start this shortened week at $1.6350, just a cent short of last Monday’s opening.

It was not a horrid week for the pound but in no way was it a success. Sterling held its position against the Canadian dollar and faded everywhere else. The reasons for its lack of traction were the same as before; central bank pessimism and uncompetitive economic data. Not every figure was nasty. Nationwide’s house price index mirrored the picture from other mortgage lenders with a +1.6% increase in August that left prices just -2.7% down from a year ago. The first revision to second quarter GDP was also a relief of sorts. After a first estimate that showed the UK economy shrinking by -0/8% between March and June the revision (still not the final figure) was toned down to -0.7%. In no way was it a good number but, even so, it was better than many investors had expected so it did the pound a back-handed favour at the end of a difficult week.

House prices are on an upward swing in the United States as well. Case-Shiller’s index of 20 metropolitan areas showed a one-point increase in June that brought it back up to the March level. Prices are still more than 30% down from their peak three years ago but have recovered – very slightly – to their level in summer 2003. On the positive side they have still risen by two thirds in the last ten years.

The dollar’s problems stemmed from the same old issue; investor confidence. US durable goods orders rose by nearly +5% in July. New home sales rose by +9.6%. Consumer confidence went up from 47.4 to 54.1 according to the Conference Board and stagnated at 65.7 according to the University of Michigan. Investors are back to the logic of early summer whereby a flourishing economy is bad for the dollar because it kills any appetite for a safe haven.

Below $1.63 the pound is looking very nervous. $1.60 is an easy target and $1.58 is not hard to imagine. A stop order somewhere south of $1.60 should be a serious consideration and buyers of the dollar should increase their hedge towards 75% of their exposure. If the time horizon is close it would not be silly to cover 100%, just in case.

For more information and expert guidance on the currency markets, call Moneycorp today on +44 (0)20 7589 3000, do not forget 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.

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