The news dominating the headlines overnight was the announcement by ‘Merkozy’; that being German Chancellor Angela Merkel and French President Nicolas Sarkozy. The way in which their names have been comically united reflects the way in which investors have viewed the announcement. Rather than stating firm actions to move forward, the leaders dabble around the idea of fiscal union and taxing financial transactions in an attempt to raise more revenues. Both ideas, despite the UK not being involved in the euro itself would affect our economy due to our association with the EU. Once again, we are likely to be severely hampered due to circumstances beyond our control.
Pound Sterling – UK Markets
After a promising start to the day, sterling has just taken a step in the wrong direction after various dribbles of data were released. It was revealed that all nine Monetary Policy Committee members voted to keep interest rates at its historic low of 0.5 percent. However, only one member, Adam Posen was in favour of initiating a second round of quantitative easing. Whilst a number of members felt that there may be cause for QE2, they eventually decided the case was not yet strong enough, with markets already having delivered easing factors on the expectation that there will be next to no policy tightening over the next couple of years.
Further hampering our economy was the fact that the unemployment rate and claimant count rate came in higher than forecasters expected. The number of people claiming job seekers allowance rose by 37,100 between June and July. This in turn caused unemployment to jump to 4.9 percent from 4.8 percent previously. Due to this raft of data, sterling took a battering at exactly GMT 09:30.
US Dollar – US Markets
Housing data is one of the very few developments that forecasters generally get right prior to the announcements. This is largely down to the fact that figures come in lower each month. Therefore, as we so rightly predicted yesterday, housing starts and building permits came in lower than the previous month yesterday. This has caused the dollar to come under further pressure and sterling, for once appears to be one of the many taking advantage of this.
However, later today forecasters believe that producer prices probably began to stabilize in July, reflecting the global slowdown in demand. The announcement is due later today at GMT 13:30. PPI rose last month by 0.1 percent after dropping 0.4 percent in June and this increase was also replicated in the core measure which excludes volatile food and energy prices. A slowdown in sales means companies will be less likely to raise prices, giving way to these changes later today.
Euro – European Markets
Delving a little further into the details of the ‘Merkozy’ announcement, the euro declined further as the two leaders rejected calls for a joint-bond plan to stem the region’s debt crisis. This came amid strong signs that eurozone growth is slowing. Furthermore, with figures showing that European inflation slowed in July and ongoing speculation that growth has all but stalled, the ECB will most likely keep interest rates on hold. The sharp economic slowdown has increased the risk of another recession.
Consumer Price Index figures came in as expected at 2.5 percent. However, perhaps more notably, core figures came in 0.4 percent lower than expected at 1.2 percent. The euro does remain under considerable strain but with meltdowns going global it appears to just be clinging on with its little finger. Sharp movements are expected throughout the week.
Other Currencies – Highlights
The Swiss franc just began to gain slightly overnight as the central bank stopped short of announcing a temporary peg to the euro as it made its third attempt in as many weeks to weaken the currency. The bank continues to boost liquidity in the market in the hope that the currency will weaken on the back of this.
The Turkish Lira has reacted to recent developments in Germany and whilst I have written very little about the currency, it has weakened significantly over recent months. The central bank may also cut interest rates at a meeting next week following the announcement that Germany’s economy almost stalled in the second quarter.
British Pound Suffers Losses Ahead of Tuesday's Critical Vote