Politics Drives Sterling

In this week’s Moneycorp Dollar update:
The likelihood of a defeat for Labour is positive for the pound. US employment data disappoint, undermining the dollar.

A quick visit to $1.6250 was followed by a slow descent to $1.59. A rebound on Thursday and Friday took the pound back up to $1.61, where it opened in London this morning.

The UK economy delivered some decently positive data. Two purchasing managers’ indices, one for the manufacturing sector, the other for services, extended their progress into the ‘expansion zone’ above 50. The manufacturing PMI came in at 54.6, taking second place to the equivalent US measure. Services, with a score of 56.8, led the international field.

The Halifax house price index added 1% in December, putting it 1.1% higher than it was at the end of 2008. Factory gate prices went up by 3.5% last year, squeezing manufacturers who had to cope with costs rising twice as quickly over the same period.

But it was not the economic data that shaped sterling’s performance, it was politics. News of an attempt to oust prime minister Brown sent the pound lower; confirmation that the coup had failed sent it back up again. Investors believe that a solution to Britain’s spending gap requires a change of government. As long as it looks as though Labour will be out of office by June they are inclined to be patient with sterling. And as long as Gordon Brown is leading his party into the general election they are confident that will happen.

The US economic indicators were all over the place. While the American manufacturing PMI logged a world-beating 55.9 its services PMI was the laggard, barely scraping into positive territory at 50.1. Factory orders rose by a respectable 1.1% in November; pending home sales slumped by -16%.

By far the biggest deal of the week was Friday’s US employment report. The monthly change in non-farm payrolls is seen as a crucial indicator of how the US economy – and therefore the global economy – is doing. For more than two years there had been a net loss of jobs every month but at the beginning of December the loss was much less than expected; 11,000 instead of 111,000. Analysts believed this improving trend would deliver a figure close to zero last Friday. There was therefore huge disappointment when the US economy turned out to have lost another 85,000 jobs in December. The dollar oscillated viciously before heading lower.

The pound has spent most of the last seven months between $1.58 and $1.68. It starts this week comfortably within that range and showing no sign of wanting to escape. We therefore stick to the existing risk management strategy: Buyers of the dollar should stick to a hedged position, locking into a rate for half the money they will need.

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 rates. Alternatively go to the Moneycorp Website where you can open a free, no obligation Trading Facility.

Foreign Exchange since 1979.

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