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Foreign Currency Summary Report For Sterling
London 12th February 2008- Moneycorp report on the movements behind Sterling last week as it touched highs close to $1.98 Last week's market was typified by strange reactions to odd figures. For Sterling the first of these was the Halifax house price index. It had been expected to fall and it didn't. Yet there was no relief rally for the Pound. A surprise improvement in the Uk services sector Purchasing Managers' Index helped Sterling against the Euro but did it little permanent good on other fronts.
The Monetary Policy Committee did what most people expected on Thursday, lowering the Bank rate by 25 basis points to 5.25 per cent. Given that a significant minority of analysts had been looking for a 50 basis point cut it would have been reasonable to expect a post-decision rally, on the basis of "sell the mystery, but the history." There was none to speak of.
The weekend brought the G7 meeting in Tokyo, attended by finance ministers and central bank heads. The main surprise - if you can call it that - from the meeting was an almost universal pessimism among individual delegates. Italy's economic minister described "a climate of much greater pessimism and worry." The German finance warned that the fallout from US sub-prime mortgage write-downs could exceed $400 million. The US treasury secretary observed that "financial turmoil is serious and persisting." Almost the only positive note came from Britain's chancellor, who said that Britain was well placed to weather the slowdown and resist inflationary pressures.
US data were all over the place. Factory orders were up: The services sector PMI bombed, falling below the 50 mark that divides expansion from contraction. Neither announcement elicited any great reaction from investors.
The most worrying aspect remains the deflating credit bubble that supported, among other things, house prices and the sub-prime mortgage market. Not only are lenders less ready to lend, borrowers are also throwing in the towel. As the previous week's employment data showed, jobs growth is not a foregone conclusion. As that message sinks in, consumers have been tightening their belts. The clamour for finance - however cheap - is no longer there.
The jury is still out on whether or not the US economy will fall into recession. Whether it does or not, the slowdown in the United States can hardly fail to dampen activity in the Americas and Europe for some time to come.
Sterling narrowly avoided being forced to test the January lows this morning but one lucky escape does not mean it is out of the woods. Buyers of the Dollar should hedge at least half their requirements, selling Sterling forward to match expected payment dates. Judicious stop orders should be used to protect against the relapse that is still a possibility.
For more information and expert guidance on the currency markets, visit Moneycorp Make your money go further!
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