Confidence in the economy will be generally fragile with fears that the limited improvement in growth conditions will not be strong enough to prevent a further substantial rise in unemployment. There will also be fears that the underlying weakness will intensify the very serious underlying debt difficulties. Sterling could still prove to be broadly resilient in the short-term, but will be much more vulnerable to selling pressure if there is a sustained deterioration in risk appetite and the overall risks suggest at least limited net losses.
Sterling weakened sharply in mid week as domestic doubts were compounded by a spike in risk aversion although the currency still proved broadly resilient. There was support near 1.60 against the dollar and beyond 0.8650 against the Euro.
The industrial data was significantly weaker than expected with a 0.6% decline in output for May following a revised 0.2% increase the previous month with manufacturing production also declining. The NIESR reported a 0.4% GDP decline in the three months to May following a revised 1.3% decline the previous month. The institute reversed its view that the economy had bottomed in April and stated that conditions were now broadly stagnant.
The Halifax house price index recorded a 0.5% decline in prices for June for a 15.0% annual decline which suggested that the underlying pressures have eased, at least on a short-term basis. The growth-related data overall tended to be a negative factor for Sterling as it raised further doubts over recovery prospects.
The UK trade deficit narrowed to a three-year low in May with a goods deficit of GBP6.3bn which will provide some underlying Sterling support.
As expected, the Bank of England left interest rates on hold at 0.50% following the latest MPC policy meeting. The central bank also announced that the quantitative easing programme would be maintained at GBP125bn, contrary to some expectations of an increase and this provided an immediate boost to Sterling.
The bank announced that there would be a review at the August meeting when the latest inflation report will be available. There were still some expectations that the bank will increase the bond buying next month and this tended to curb any significant improvement in sentiment towards the currency.
Swiss franc:
The Swiss franc has continued to be broadly resilient in global markets and has resisted selling pressure. The National Bank will remain on high alert over the situation and there is still the strong probability of further intervention to weaken the currency if there are gains from current levels. Volatility could, therefore, be an important risk if the markets look to take on the central bank.
The dollar was unable to make a significant challenge on resistance levels near 1.10 against the franc during the week and weakened to lows below 1.08 before correcting higher again. The franc was also able to secure a renewed advance against the Euro with highs near 1.51.
There was some further speculation over fresh intervention by the Swiss National Bank, although there was no actual sign of the bank or the BIS in the market.
The Swiss unemployment data was weaker than expected with an increase in the seasonally-adjusted rate to 3.8% from 3.6% which maintained unease over the domestic economic trends. |