There had been a lot of talk about the performance of economies and currencies plus what will be the result of certain austerity measures that could help positive growth. Well a half-cent rally ran out of steam on Monday and the pound lost more than a cent on Tuesday and Wednesday. On Thursday it leapt higher, adding a cent and a half during the London session before coming to a stop. Its net gain on the week was one and a quarter cents and the highest level for nearly three weeks.
News out of the UK stated that the economy was not great and there were rumblings that the economy is stagnating. Sterling's early lack of performance stemmed from feeble UK economic indicators. There were not many of them and they were almost all weaker than anticipated. The services sector purchasing managers' index dropped by more than four points to 51.1 in August. It was still in the expansion zone but not by much and it was three points shy of forecast.
The BRC retail sales monitor showed like-for-like sales down by -0.6% on the year when they should have been unchanged. The Halifax house price index lost 2.6% in the year to August. Industrial production fell by -0.7% between July 2010 and July this year. The only ray of hope - and a dim one at that - was a 0.1% monthly increase in manufacturing production that contributed to annual growth of 1.9%.
Sterling's eventual success came as a result of what the Bank of England's Monetary Policy Committee didn't do on Thursday. There had been concern that the weakness of the economy and the lack of employment growth would encourage the MPC to decide on a second round of asset purchases (quantitative easing). One of the nine members has been pushing the subject since last October. Thus far Adam Posen has been a lone voice but investors were suspicious that others might now have joined him. When the MPC announcement made no mention of a second round of QE there was a relief rally for the pound. The pound to euro now stands at just over 1.15 (as I write this article)
Even though Britain's economic data might have been a bit lacklustre the Eurozone did not excel itself either. Germany's services PMI was identical to the UK at 51.1 Chancellor of Germany Merkal lost another election in her own constituency no less. The social democrats came in with 36.1% of votes, while Merkal received 23.3% of votes. Merkals election campaign was based on her party handling of crisis in the euroland. The Germans showed they were not happy about bailing out other countries.
In the US president Barak Obama outlined his plans to create more jobs as he talked about a $447 billion jobs package. His planed (£282bn) package of tax cuts and spending plans are aimed at trying to boost the economy. This will include funding for teachers and firefighters – and tax cuts for small businesses. He told congress that politicians needed to act quickly to pass the package. However, some Republicans have already dismissed the plan as a crude attempt to boost the president’s flagging popularity in the run-up to next year presidential election. Is there a possibility of a third round of QE on the cards? Well, we will have to wait until the next FOMC meeting a fortnight’s time.
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