Bank of England Keeps Turning The Screw

In this week’s Moneycorp update:
Governor believes weaker pound “will be helpful” in rebalancing the economy. Federal Reserve calls for a wind-down of some stimulus lending.

A week of two halves saw sterling clamber from $1.6150 almost to $1.65 before turning tail on Wednesday and slumping to $1.58. It opened in London this morning just up from the overnight lows at $1.5850, 2% down on the week and 4% off its mid-week peak.

With very few useful data from the UK economy, investors and traders mainly had to make do with the occasional snippet of news or views. There was much jubilation at Tuesday’s paper from the CBI suggesting Britain was out of recession and that the economy would grow by +0.9% in 2010 having shrunk by -4.3% this year. Even more exciting was the research report from Goldman Sachs. The investment bank reckoned the pound’s weakness was “enough to push the UK’s current account into comfortable and permanent surplus”. It said the weak currency would accelerate Britain’s economic recovery, as it did in the early nineties, and it recommended that its customers buy sterling, looking for sterling/euro to reach €1.19 by the end of the year.

The minutes of the September Monetary Policy Committee meeting, published on Wednesday, brought further relief for sterling. When investors saw no mention of further easing – quantitative or qualitative – they reacted by reversing speculative short positions and pushing the pound higher against most currencies.

The euphoria came crashing to earth when a Newcastle newspaper, The Journal, published an interview with Bank of England Governor Mervyn King. In it, the governor landed another of the low blows that have come to be synonymous with the MPC team. He said the decline in sterling’s value “will be helpful” in rebalancing Britain’s economy. You didn’t need to be an economist to figure out the enormity of that one. Investors know a sell signal when they see one and they hurried to offload any surplus pounds still cluttering their positions.

As usual, the dollar spent most of its time reacting – or not – to the performance of global equity markets and investors’ presumed appetite for risk. The US data painted no decisive picture either for the prosecution or defence. The Richmond Fed’s manufacturing index could not match the strong performance of those from New York and Philadelphia a week earlier; it was unchanged at 14. Existing home sales were down, new home sales were up in August. Weekly jobless claims were better than expected; durable goods orders were worse.

The Federal Open Market Committee – America’s MPC – disappointed the market by being less upbeat than investors had hoped. Its statement was by no means pessimistic but the FOMC still feels that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” The implication was that dollar interest rates are not going up any time soon. More positive for the dollar was a later statement that that the FOMC would scale down some of its emergency lending projects because the financial climate is improving. The market warmed to the news and the dollar had a good day for the first time in ages.

The Bank of England’s remorseless war of words on the pound persuades some observers that it has a deliberate policy of easing through devaluation, even though there is no official acknowledgment of such a strategy. Although the pound is overdue for a rebound it is hard to imagine what might provoke it and how high it might carry. Buyers of the dollar should continue to hedge three quarters of their requirement with a forward purchase. If the underlying

For more information and expert guidance on the currency markets, call Moneycorp today on +44 (0)20 7589 3000, don’t 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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