For the second day running we have seen Sterling strengthen against all major currencies which is unusual for this time of the month as we are fast approaching an interest rate decision by the BoE. Over the last couple of months their was a lot of speculation leading up to the interest rate decisions by economists that UK interest rates would come down and right they were by a reduction of 1% on each occasion.
On the back of all the speculation Sterling exchange rates suffered drastically. Hitting new lows were a daily occurrence and we got extremely close to parity. Often the signs that we were going to reduce our interest rates were priced into the markets prior to the announcement but this week we have seen the markets reacting in a different way.
All the signs are there again that we will have another interest rate reduction somewhere between 0.5%-1% but the difference this month has been that for two consecutive days we have seen a sterling gain around 5 to 6% of its value. On Monday the Euro suffered its biggest one day loss against the pound with us strengthening by over 3% against the single currency and yesterday we saw another 2.7% gain moving us further away from parity to a 3 week high.
This is great news for all businesses who import goods from Europe and all Brits who are purchasing dream homes abroad but how long will this spike in the market last?
There may still be a lot of bad data to come out of the UK this year which can only bring the pound crashing back down. Some of yesterdays data showed that British house prices fell another 2.5 percent in December to make 2008 their worst performing year on record, with a total loss of 15.9% over the course of the year a survey from the Nationwide Building Society said.
How much further will UK house prices fall? If you think they will continue to drop sterling exchange rates will more than likely suffer. Separate figures from Nationwide showed British consumer confidence sank last month to its lowest level since the survey began in 2004 on worries about job losses resulting from the economic downturn.
The leading High street firm Marks and Spencer are set to announce today that they are set to shed 1000 jobs which is less than 2% of its work force which shows signs of high street weakness. The company will also announce its trading update for Christmas while two other large retailers Next and Debenhams have already made statements that their sales had dropped 7% in the six months to Christmas Eve, while Debenhams said its sales in the past 12 weeks had fallen 3.3%
These three retailers give us a good indication as how the UK shops are doing. If their sale figures are down we are sure to see many more with probably even worse figures. Again more bad data from this sector could mean that sterling exchange rates could come down again.
The Chartered Institute for Purchasing and Supply said its services PMI edged up to 40.2 last month from a record low of 40.1 in November - still indicating severe weakness in a sector that makes up three quarters of Britain's economy.
This is an indicator of the economic situation in the UK services sector. It captures an overview of the condition of sales and employment. Any reading above 50 signals expansion, while a reading under 50 shows contraction. If the level stays under 50 for the foreseeable future this could again show signs of a weak economy and sterling could weaken on the back of it.
These are just a few examples of why our economy is not in the best of places at the moment and why exchange rates could falter over the coming months. With the recession expected to last well into 2010 you may want to keep in close contact with your account manager and we can talk you through all the options available to you with different types of contracts that you could enter into now to secure a rate whilst this unexpected spike in the market is here.
Once the interest rates come down tomorrow we could lose ground and entering into a contract will protect you from any possible declines.
EUR
The main reason for the spike in the market at the moment would seem to be that there is a lot of pressure on the ECB to cut their interest rates by around 0.5% next week due to Eurozone inflation figures falling to an annual rate of only 1.6% last month which is down from 2.1% in November. This drop is much larger than expected so we could see a small reduction of between 25-50 basis points. This is much less vigorous than the BoE so I don’t believe that we will see sterling gain anymore than what we already have over the last couple of days trading.
USD
Yesterday’s FOMC minutes in brief stated about the weakness in consumer spending was one of the major areas of concern. It was noted that the combined impact of lower equity prices, declining home prices, tight credit conditions and rising unemployment was declining consumer spending. The outlook for inflation was the second area of concern.
There were mixed opinions about whether inflation will even itself out at desired levels or if it will decline to a level that is not consistent with price stability. The general consensus was that close monitoring of inflation expectations in the months ahead is necessary. The dollar weakened slightly yesterday on the back of the minutes and oil going up to $50 a barrel. This is a brief summary of todays report. Click here to read the full report on our main website
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