Sterling remains weak following poor data

Sterling’s Weakness against the Euro
Sterling fell across the board yesterday, hitting a 1 month low against the EUR after weak UK industrial production data fanned further doubts that the economy is in for a quick recovery.

The news dashed hopes that the economy may have rebounded in the second quarter after it suffering its steepest fall in 50 years during the first three months of the year. The news halted the rise of the pound we have seen up until the start of July.

There are also concerns that the Bank of England will expand its quantitative easing programme when it announces its latest policy decision tomorrow. Last month the headlines proclaimed an end to the recession after growth returned in April. However, figures show that the UK economy is stagnating rather than continuing to contract at a sharp pace.

Bank of Scotland Treasury currency strategist Naeem Wahid said : “Sterling is one of the weakest currencies out there. This data has wiped out some of the signs of recovery and people are unwinding GDP expectations, which has weighed on sterling”

More Quantitative Easing by BoE?
Analysts said the weak industrial output figures yesterday increase the chances that the BoE will increase its asset purchasing programme.

“Sterling remains a broad underperformer as the unexpected 0.5 percent decline in May manufacturing output adds to existing concerns over further debt monetisation by the Bank of England,” CMC Markets analyst Ashraf Laidi said.

Many predict the central bank will raise its 125 billion pound asset buying programme by a further 25 billion pounds to the maximum permitted without further finance ministry approval, or possibly ask for more, though some expect that next month.

Analysts also found little to cheer in an earlier British Chambers of Commerce survey, which showed the UK is not yet out of recession despite a marked easing in the pace of decline in manufacturing and services during the second quarter.

So, while the markets look at the daily data releases, the markets are in limbo as there is uncertatiny of the value of the pound. We still forecast a general strenghtening of Sterling in the medium to long term, and rates should have pushed through €1.20 by year end. In the meantime however we could see continued weakness if the data continues to be bad.

UK Bank Reform
The UK government is set to announce its plans today to reform the financial system to prevent future crises. New powers will be proposed to curb bank lending and prevent asset bubbles such as the housing boom, undermining the real economy.

The governor of the Bank of England, Mervyn King, has said that without increased powers his role is merely to “preach sermons”. Many think he will get little extra power. However, if the Conservatives win the next election they have pledged to give the Bank of England a lead role in financial regulation.

My view is that when power was taken away from the BoE, in favour or a 3 way system of regulation for BoE, FSA and Government meant that no one body was responsible as a whole, and no-one could see the wood from the trees. Perhaps the FSA’s role will be reduced and more power given back to the BoE in the future.

Finally,
Having grumbled about billions spent on banks, the Irish have rescues one of Ireland’s few original contributions to world cuisine: the “spice burger.”

The Dublin based makers of the crumb-coated beef burger were running out of cash but Walsh Family Foods could not raise enough and called in a receiver. However, a public outcry and a “save our spice burger” campaign on Facebook helped receivers KPMG to secure enough new orders for the more than 50-year-old company to resume production with 20 workers.

The recession has generally boosted demand for cheap fast food but the Irish Times said Walsh Family Foods, which also sells in Britain, had sustained losses due to the weakness of sterling versus the euro and tougher competition.

“It’s well and truly back,” Walsh said of his burger. “No matter what happens, it’s going to be on the market for a long time to come.”

Phew.

Todays Data
UK – Halifax House Prices
EU – Gross Domestic Product
Ger – Industrial Production
US – Crude Oil Stocks
US – Consumer Credit

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