Weekly GBP Euro Update - 20 July 2010

Published on 7/20/2010 in Your Spanish Home

STERLING RALLY RUNS OUT OF STEAM

Sterling spent the first four days of the week around a one cent range. A couple of explorations above that range failed to improve the rate by much. A sell-off that began on Friday morning took the pound down and that was where it was trading when London opened this morning.

Euro notesMonday's delayed final revision to Britain's first quarter gross domestic product (GDP) figures brought mild disappointment. As expected, GDP expanded by +0.3% in Q1. That was fine. But there was also a surprise in there. Earlier estimates for the peak-to-trough decline in GDP had put the figure at -6.2%. The final revision updated that figure to -6.4%. There was also confirmation that, in volume terms, the 4.9% fall in calendar 2009 was a record annual drop.

Tuesday's inflation figures were more positive. Consumer prices went up in June when they had been expected to be steady. The core consumer price index was up by 3.1% on the year instead of the forecast 2.8%. The retail price index (RPI), upon which many wage negotiations are based, was ahead of forecast both on a monthly and an annual basis.

The figures were not miles away from what investors had been expecting but were sufficiently adrift in the right direction to take sterling higher. The other important set of data was Wednesday's employment numbers. The overall tone of the report was positive, with 160,000 more earners and a fall in the unemployment rate from 8.0% to 7.8% but the details were unnerving. Most of the increase - 117,000 - was again the result of part-time hirings.

The number of self-employed rose by 59,000: whilst this would be an optimistic sign in a booming economy it smacks of desperation in times of austerity. Nevertheless, the market was happy to see the headline numbers moving in the right direction and investors' first reaction was to buy sterling.

Beyond the statistics not all the news was good. Standard and Poor's warned at the beginning of the week that there was 'still a material risk' that UK government debt could reach a level' incompatible with the AAA rating'. China's Dagong Global Credit Rating Company made its first foray into the sovereign ratings game and did not give Britain a particularly favourable assessment. At AA- the UK, together with France and Japan, received a lower rating than a dozen other countries.

The United States was just one grade higher at AA. Monetary Policy Committee (MPC) member Adam Posen did not help matters. He told a regional newspaper that 'There is a chance we could slip back into recession.'

The euro continued its recovery on a broad front, adding another four cents against the US dollar that brought the tally for July to seven and a half, more than 6%. To a large extent the euro's driver was investor nervousness about the sustainability of the US economic recovery but the euro zone did make some contributions of its own. Those contributions were not the economic data though.

ZEW's survey of German economic sentiment fell by nearly eight points to 21.2. It was a similar story for the euro zone as a whole, where sentiment dropped to 10.7. Both figures were at least four points below forecast. Finalised data for June's Consumer Price Index (CPI) were on target with inflation running at an annual 1.4%. Industrial production was disappointing as well, rising by 0.9% in May instead of the 1.2% investors had been expecting.

Even the Euroland balance of trade was unhelpful with a seasonally-adjusted deficit of -€3.4 billion instead of the expected €0.8 billion surplus.

What did help the euro was some encouraging news from Club Med on the debt front. Greece was able to sell six-month treasury notes at a yield of 4.65%. There were bids for more than three times the €1.6 billion that were on offer.

It was not the sort of performance that would have had them cheering in the streets of Berlin but, in the context of abiding nervousness about Greece, it was a result. An equally successful bond auction by the Spanish government managed to shift €3 billion of 15-year bonds with the market apparently happy to buy even more. Portugal and Italy achieved similar successes.

The Spanish sale went some way to offsetting an embarrassing revelation by Spain's central bank. The Bank of Spain said the country's commercial banks had soaked up more than a quarter of all the money lent by the European Central Bank (ECB) to the euro zone banking sector. Investors did not react strongly to the news; they are waiting to see the results of the 'stress tests', applied by the European Central Bank, on Friday.

The euro fared considerably better than the pound last week and it threatens to repeat the exercise. Sterling's challenges this week will include Tuesday's public sector borrowing figures, Wednesday's minutes of the July MPC meeting, Thursday's retail sales and Friday's first estimate of second quarter GDP. They all present potential pitfalls for the pound. Buyers of the euro should continue to hedge half their requirement until sterling's future course becomes clearer.

Written by: Moneycorp

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For more information about how Moneycorp can save you money when sending money abroad, please visit the dedicated Eye on Spain/ Moneycorp website.




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