Weak UK data puts further
downward pressure on the pound
The prospects for a strong return to growth for the UK
retail sector in January seemed very reasonable based on anecdotal evidence but
Friday’s -0.6% stopped us dead in our tracks. When you combine this with the
Bank of England’s Quarterly Inflation Report, which highlighted an outlook of
weak growth and persistently high inflation over the next few years, it is
little wonder that sterling has failed to bounce back in the past few sessions.
The MPC minutes are released on Wednesday and despite
poor economic figures, we believe it is more likely that the lone QE voter
David Miles dropped his vote than actually recruiting other members to his
cause. The high inflation outlook really doesn’t seem consistent with additional
QE, particularly while the Funding for Lending Scheme is providing the UK
economy with support. Whilst Sir Mervyn King did state last week that the MPC
stands ready to do more QE if necessary, we still believe his doubts over how
much more this can achieve will dominate the voting in the coming months.
What hasn’t been helpful to the pound today have been
Martin Weale’s weekend comments supporting a weaker pound to aid exports and
address the UK’s current account deficit. Some might have interpreted this as a
rare foray into the dangerous field of verbal intervention but we doubt it was
much more than an example of wishful thinking.
Euro
gets away with awful eurozone GDP figures
GDP data from throughout the eurozone, which significantly
included Germany, was very disappointing last week. The euro is trading at a
three-week low against the US dollar as a result of this confirmation that the
eurozone recession is worse than many had feared, but levels above $1.33 are
still pretty firm. Meanwhile, the euro continues to bully the pound down below
€1.16.
News out of the eurozone may have been bad last week
but hopes are rather higher for this week’s eurozone data. Further improvements
are expected within this week’s key German economic sentiment and business
climate gauges. Meanwhile, Thursday’s eurozone PMI figures are expected to
point to stabilization, even if the region does remain in recession territory.
US
dollar enjoying plenty of demand amid firmer data
Recent headlines out of the US have been upbeat;
weekly unemployment claims data improved sharply, while manufacturing and consumer
sentiment figures also impressed. This provided a timely contrast with awful
data out of the UK and the eurozone and may well have reminded many players why
the USD should, in our view, be preferred to the EUR and GBP (in spite of QE3).
The week ahead brings the minutes from the last Fed meeting (Wednesday), which could
well reveal some discussion as to when QE3 can start to be scaled back. The bar
remains pretty high in respect to this but discussion alone should be
USD-positive.
End of week forecast
|
GBP /
EUR
|
1.1500
|
|
GBP /
USD
|
1.5400
|
|
EUR /
USD
|
1.3400
|
|
GBP /
AUD
|
1.5100
|
|
|
|
Sterling is trading below €1.16 this afternoon and we
suspect the rate will head lower from here, with levels close to €1.15 representing
a realistic target. It continues to prove tricky to call a bottom on GBP/USD’s
slide but we think the pair will take a close look at $1.54 before a bounce is
in sight.
Richard Driver
Currency Analyst
Caxton FX
