Broad Improvement for Sterling

In this week’s Moneycorp Dollar update:

MPC member sets the ball rolling with talk of higher UK interest rates. Dollar still deflated after the previous week’s poor employment figures.

Starting from $1.61 the pound had a false start on Monday with a near one-cent rally that quickly failed. Sterling’s supporters were more successful on Tuesday and by the end of the week the pound had broken above $1.63. A half cent setback on Friday morning was followed by a late return to the highs and when London opened this morning the pound was trading at $1.63.

Sterling had a good week on almost every front. On the rare occasions it failed to make progress – and only the yen springs to mind – it was steady. There was not universal support in every case to start with but by Tuesday there was wind in every one of sterling’s sails. The pound owed its uncharacteristic advance to the Bank of England, specifically to Andrew Sentance, a member of the Monetary Policy Committee. He told The Guardian newspaper that ‘Threadneedle Street has done enough to lift Britain out of its deepest post-war slump and will need to consider raising interest rates this year if a recovering economy poses a threat to inflation.’ In his opinion the sixth consecutive quarter of falling output in the third quarter of 2009 presented ‘an excessively downbeat’ picture of the UK economy and he downplayed the risk of a double-dip recession.

That argument received corroboration the following day. The National Institute for Economic and Social Research (‘Britain’s longest established independent economic research institute’ according to its own blurb) reckons the economy grew by +0.3% in the fourth quarter, contracting by -4.8% in calendar 2009. That last figure was given added punch by simultaneous news that Germany’s economy shrank by -5.0% on the year. Although the NIESR is not responsible for the ‘official’ figures investors were happy to accept that the UK economy had finally returned to growth and they clung to that upbeat mood for the rest of the week.

It was just the opposite for the dollar. The previous Friday’s hugely disappointing employment report was still relatively fresh in investors’ memory and it took them most of the week to get over it. None of the data was sufficiently positive to provide counterbalance the unexpected fall in non-farm payrolls. US retail sales were much softer than expected in December, inflation was lower than forecast and consumer confidence fell short of predictions, only just managing a monthly improvement in January. The Federal Reserve’s Beige Book survey of the US economy was mainly helpful, with 10 of the 12 Fed districts said things had improved in December while the other two reported ‘mixed’ conditions. All in all, the US economic data ended up damning the dollar with faint praise.

The pound has spent most of the last seven months between $1.58 and $1.68. It starts this week bang in the middle of that range. We therefore reiterate 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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