Sterling touched 5 week high’s against the Euro at 1.2740 and two dollars plus on cable this week in response to the release of the Bank of England’s Monetary Policy Committee minutes which showed a three way split in their decision to keep rates on hold at the beginning of the month. One member a piece voted to hike and cut with seven keeping with on hold. The rhetoric in the minutes would appear to be on the hawkish side with the conversation more in tune with hiking rates than cutting. The economic slowdown in the UK appears to be picking up in pace as the biggest recorded monthly fall in consumer spending heightened fears of a meltdown on the high street with sales off 3.9%. This coincided with further grim news from the housing market which showed soaring repossessions, Yr / Yr home loan approvals falling by a spine shaking 66.9% to 21,118 new loans. By best guess is that the BOE will not hike rates from the current 5% rather keep them at the present level for the time being and in keeping with the Central Banks rhetoric in fighting inflation. The economic slowdown will in turn dampen demand, tightening of labour markets will ensure that wage demands are not inflationary, lower global demand will lead to lower commodity prices and that will eventually feed through to lower inflation. Oil prices have fallen back to around $125 per barrel on fears that record prices were stunting growth. There is however always the chance of geo political problems affecting production and supply most notably heightened tensions between Israel and Iran and disruption in the Straights of Hormuz. Almost all economic indicators are pointing south and for that reason Sterling will not break out of any of its recent trading ranges against the US dollar or Euro for the time being at between 1.96 – 2.180 and 1.2490 -1.2740 respectively. If the economic situation continues to deteriorate then the odds will shorten that the Bank of England will cut rates with some analysts predicting towards the end of the year – QTR 1 2009. UK GDP numbers released on Friday showed Quarterly growth up just 0.2% and 1.6% Yr/yr the lowest in over 3 years and so despite the gloom the UK is not in a recession, officially recorded as two consecutive quarters of negative growth…….yet!
Sterling is holding its ground against some of the commodity driven currencies as oil prices track lower, the Canadian Dollar is bumping along at 2.0170 - well off it’s recent peak just north of 1.93 and the New Zealand Dollar was trading down to 2.68 from 2.6650 as speculation mounts that the Reserve Bank of New Zealand will soon cut interest rates.
EURUSD breached 1.59+ before the greenback rallied back to 1.5650. The dollar managed to hold on to its gains on Friday morning even after the largest single one day sell off of US equities since 2000. There were further fears and rumours of another troubled US bank and a rout in the number of US home sales. In Europe, money supply growth fell back to 9.8% and is likely to help refrain the ECB lifting rates further in the short term.