Market News

05/08/2009

Market News by Head of Treasury Services, David Lamb

The UK has produced some very mixed data over the last month, pointing to increased uncertainty and ensuring the path for sterling is likely to remain clouded.

On the positive side, mortgage data has continued to improve although lending liquidity is still far from normal. Although volatile in nature, retail sales were encouraging last month while just this week a much stronger than anticipated manufacturing PMI index release, back into expansion territory for the first time in 16 months, has added to the good news for sterling.

This latest news came in stark contrast to the recent release of Q2 GDP which was much weaker than consensus which, in dropping an annualised 5.6%, was the worst decline since records began in 1955. Poor unemployment data did little to add confidence in any consumer led recovery with the figures showing the largest quarterly increase since 1971. Slightly better than expected, but still at exorbitant levels were the public sector deficits.

Meanwhile, the Bank of England surprised markets by halting the quantitative easing program at the previous announced £125bn level when many had expected the asset purchases to be increased to the full £150bn authorised by the Government. The MPC (Bank of England Monetary Policy Committee) will revisit the issue on Thursday this week where opinion is very much split on the outcome. Interest rates will once again be held at 0.5% for the fifth consecutive month.

What has all this meant for sterling over the last month or so? All things considered, particularly in light of the disappointing GDP data, sterling has performed exceptionally well. Against the US$, the pound has continued to build on the steady gains seen this year and barring a swift return to investor risk aversion, could be on track to tackle the $1.7000/1.7350 area. Holding above $1.6350/1.6200 is the key to the current trend.

Against the euro, despite not quite reaching the heights just above €1.19 seen in late June, sterling remains well off the €1.02 lows from the tail end of last year and provided an area of support between €1.1550 and €1.1325 contains any immediate downside testing, the psychological €1.20 level, elusive since the beginning of December last year, could yet be on the cards.

Interest rates:0.50%
Unemployment Rate: 7.6%
CPI Inflation: +1.8 y/y to June ‘09
GDP: -0.8% q/q to June ‘09

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