Monday has opened with the volatile momentum that we may continue to see over the next five days. The week is starting with the Pound moving down from the 1.19s to the 1.18s against the Euro and the 1.58s to the 1.57s against the US Dollar as some poor housing data has taken a hit to the Pound. The housing sector is often the Achilles heel in the UK economy with the Rightmove index this time showing a price decrease of -3% in stark contrast to the strengthening manufacturing sector which we saw last week conversely boost the currency. Today’s drop however is an immediate movement rather than the overall picture. The larger portrait of currency movements is still all-dependent on the European sovereign debt crisis with the Pound generally maintaining strength against the beleaguered Euro, whilst the US Dollar also gains as a safe haven. Also significant will be UK inflation data on Tuesday – this does in fact have the potential to push Sterling higher as a high reading raises expectations that interest rates will eventually rise.
Since the last blog the Irish budget got passed in the Irish Parliament although this was by a slim majority. This may well have done something to calm fears about Euro-zone debt although as tends to be the case with Europe of late, the focus is simply shifting onto the next obstacle to be overcome. Namely, European leaders have been publically disagreeing about the best way to handle the form and quantity of rescue funds required. As there is a meeting due beginning on the 16th this week regarding this, it is likely that uncertainty will continue to plague the Euro this week.
As for the US Dollar, last week we reported that poorer jobs figures had dragged down the currency. This week the situation has turned around with consumer confidence and trade balance data coming in above forecasts last week and helping the Dollar up on Friday from a fall on Thursday. This week sees the interest rate decision on Tuesday and inflation data on Wednesday.
The UK, Australia, Canada, New Zealand and China all held interest rates last week. Although this was widely expected for the most part other than China, it does signify a slowing down of recovery globally. Although it has been much debated whether the UK should raise interest rates to deal with high levels of inflation, the Bank of England seem set on monetary policy for now. In terms of the Pound, one of the largest upcoming challenges looking several week’s ahead, will be January’s VAT rise.
Sterling Rises on Hopes of EU Softening Tone on Backstop