Sterling continues to fall, outlook is poor.

Sterling fell on Tuesday, wiping out early gains and approaching a near three-month low versus the euro after a surprisingly weak reading of UK manufacturing cast doubt on the UK economy’s recovery prospects. Rates at 08:30am stand at:

  • GBP/EUR 1.1350
  • GBP/USD 1.6138
  • GBP/AUD 1.9420
  • GBP/NZD 2.3894
  • GBP/CHF 1.7232
  • GBP/ZAR 12.716
  • GBP/JPY 149.86

The poor PMI figures were the main reason the pound fell. An index of British manufacturing activity fell to 49.7 in August from a downwardly revised 50.2 in July. It fell short of expectations for a rise to 51.5, and came in below the 50 level (anything above 50 signals growth, anything below 50 signals contraction.

It’s far too early for people to think that sterling’s troubles are behind it. There are other better currencies around whose central banks are more likely to raise interest rates, as outlined in yesterdays report.

Traders said market participants had been caught long on the pound, which had climbed in early London trade after a recovery in Asian share prices had stoked appetite for riskier assets. The pound extended losses after taking a beating last week, when dismal UK business investment figures and data confirming that the economy contracted in the second quarter further convinced the market that UK interest rates would remain at a record low 0.5 percent as quantitative easing continues. We look today to house price data for the UK, and Gross Domestic Product data for the EU. We expect the GDP to show a decline of -0.1% monthly and -0.7% year on year. If figures are better, then the Euro will strengthen and rates will fall further.

US Dollar
The US Dollar climbed against Sterling for a fourth consecutive week, largely owing to Sterling weakness rather than US Dollar strength. Increased investor optimism of global recovery prospects generally lowered demand for the Dollar purely on account of its perceived safe-haven status.

Looking forward to this coming week the US Economy looks set to strengthen further after the US Government reported improvements in manufacturing activity, consumer confidence, house prices, new home sales, and durable goods orders all boosted US recovery expectations, having an adverse effect on the Dollar.

Existing home sales are currently at their highest in almost two years and additionally last week, both the New York and Philadelphia Federal Reserves’ reported sharp increases in manufacturing within their regions.

This was reinforced last Tuesday when the ISM Manufacturing Index reported record figures since January 2008. Hopes were further fuelled by a lower than expected 1% annualised contraction in GDP over the second quarter, compared to -6.4% in the first quarter.

Contrary to this the US Governments “Cash for Clunkers” car scrap page scheme, similar to those seen in Europe, ended on 24th August. As a result the Automotive Industry is set to see a considerable drop in output.

Important US economic data to be released this week include the US Federal Reserve policy meeting minutes on Wednesday and non-manufacturing activity data on Thursday. Friday’s non-farm payrolls report is expected to show job losses narrowing to the lowest level for a year, and could inspire greater confidence in the economy if losses are less than expected.

It remains to be seen whether these positive figures from the US could lead to a trend in the selling of the US Dollar in favour of riskier assets. This rise in demand could see a weakening of the dollar, however skepticism in a global recovery could well spur a return to the safe haven of the Dollar and have a counter effect on the currency.

Australian Dollar
The Australian economy grew by more than expected in the second quarter of 2009, boosted by increases in household consumption and business investment. The economy expanded by 0.6% in the three months to June from the previous quarter, the government said.

Analysts had forecast growth of 0.2% after a sharp drop in export prices was announced earlier in the week. The better than expected figures have strengthened the AUD, and rates have dropped as a result. At the time of writing, GBP/AUD stands at 1.9420.

Todays Data:
Aus – Gross Domestic Product
UK – Halifax House Prices
EU – Gross Domestic Product
US – Mortgages Applications
US – Non Farm Productivity
US – Fed Speech
US – FOMC Minutes
US – Factory Orders

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