Sterling Continues to Suffer
Well if you thought England-Australia was bad! Stock markets have taken an absolute hammering this week in the conspicuous absence of any positive economic data.
After the failure of the G20 to deliver a blueprint for economic recovery, markets opened the week with a cautious tone. Negative data continued throughout the week and Wall Street took a fresh battering overnight as oil dropped to below $50 a barrel and widespread job losses were announced.
To quickly recap for the UK, figures this week show inflation has dropped to 4.5% in October, down from 5.2% in September. This is largely due to the drop in energy prices recently as oil has fallen to below $50 a barrel, crazy when you consider it was $147 a barrel as recently as July. Although still running well above the official target of 2%, declining inflation allows the MPC more scope to stimulate the flagging economy. On the flipside of course, we may see deflation and price stability become an issue in 2009.
The release of the MPC minutes on Thursday showed a committee unanimous in its decision to cut the base interest rate to 1.5%, having even considered a 2% reduction. 1.5% was favoured to avoid shocking markets and devaluing Sterling too sharply, while still leaving room for future cuts up the Bank's sleeve. A 0.5% cut next month is widely expected. Retail sales figures for October came in better than expected, down by 0.1% rather than the predicted 0.9% decline. Government spending is nearly double that of this time last year and this morning the government is attempting to dampen speculation of tax cuts ahead of its pre-budget report on Monday.
The US has once again been the driver of international market movements this week. Deteriorating growth prospects, rising unemployment and plunging inflation levels have sent Wall Street into a tailspin, reaching lows not seen for 10 years. Minutes of the Federal Market Open Committee meeting were released this week and painted a very bleak picture of the US economy. Negative to flat growth is predicted throughout 2009 and the US also experienced a record decline in consumer inflation. Unemployment is currently running at 6.5% and set to increase as finance, manufacturing and service sectors contract and cut staff as a result.
Europe has been overshadowed on the data front this week and the Euro has made tentative gains, supported by the negativity weighing on the Dollar and Pound. We are still seeing volatility in the Eastern European currencies, Zloty again posting large ranges against the Pound.
With such a black economic cloud hanging over growth prospects at present, there is little positive news for markets to feed on. Confidence and sentiment are still proving to be the most important market drivers and the US tipping towards recession is fuelling a vicious circle for markets. While we are still experiencing this degree of volatility, information and timing remains crucial for foreign exchange. With data such a key driver of market movements, it pays to know what is coming up and when. In the week ahead, the pre-budget report will be crucial for Sterling as it will provide clues as to how the government plans to tackle the economy in 2009. If you need to trade currency, have you dealer inform you of market movements.
Have a good weekend!