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Weekly Currency Update - GBP/USD Week ending 14th August

Weekly Currency Update - GBP/USD Week ending 14th August

Old Aug 18th 2009, 12:32 am
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Default Weekly Currency Update - GBP/USD Week ending 14th August

Hi All,

As promised here’s a brief update on what’s been happening with the US Dollar over the last week.

Following the Bank of England’s decision to extend their programme of quantitative easing, Sterling remained under pressure early last week in anticipation/fear of some nasty downward revisions to the Bank’s politically independent economic forecasts within their quarterly inflation report. GBP/USD sank to 1.64 despite the BRC reporting a healthy 1.8% rise in retail sales in July (the good and bad weather helping apparently !!) and the forward looking RICS housing survey making great strides back towards a positive number, which would signal the majority of surveyors were seeing price rises. The latter’s -8% reading being the best since August 2007. Ahead of the inflation report, the UK unemployment stats revealed another jump in the rate to 7.8%, the worst since 1996, and a total of 2.4 million unemployed, the worst since 1995

The Bank’s revised forecasts finally brought closure to the past week’s anxiety, revealing that, according to the BoE, the recession was indeed likely to be worse than they first thought, with 2009 being downgraded from -3.9% to -4.4%, but that 2010 was likely to be closer to +1.8% than the originally forecast +1.1%. This more optimistic scenario questioned the need for the additional QE but the answer can be found in the accompanying comments. In short, the Bank are worried about undershooting the 2% inflation target. Their model forecasts that at 0.5% rates and the current £175 billion of QE, inflation will only be at 1.4% in 2 years time, with a downside risk that deflation will rear its ugly head. The lesson from Japan is that there is a significant risk to economic recovery if the deflationary spiral has taken hold and faced with nowhere to go on interest rates, additional QE was the bank’s only option. However, we note that every announcement or extension of QE in recent months has only temporarily depressed the associated currency and we have no reason to question this pattern.

In the US, the Fed did not follow the BoE’s lead on QE and sounded a more relaxed note in response to the ‘levelling off’’ of the economy and merely confirmed that rates were set to stay low for an extended period. Weak retail sales the next day suggested that the US economy was still a long way short of outright growth.

USD Movement – High’s & Low’s of last week (10/08/09 – 14/08/09)

High’s: 1.6720
Low’s: 1.6390

A movement of: 2.01%.

Difference on £200k

High: $334,400
Low: $327,800

Difference of: $6,600

Whilst FX isn't the most thrilling of subjects, the sooner you begin to think about your money transfers, the more likely you are to make your money go further.

A further update will be added next week.

Regards




Mark Bodega
Director - HiFX
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