Market News

07/07/2010

Sterling made headway against both the dollar and euro last month with a 4 ½ cent net gain (or 3.1%) on the dollar and 4 cent gain (3.4%) on the euro. The gain on the euro marks the fourth consecutive month of gains for the first time since early 2005.

Once again, no change from the Bank of England to either interest rates or the asset purchase program. However, the meeting minutes released later in the month did spring a surprise with the first split vote since February last year. Andrew Sentence was the sole dissenter in a 7-1 split with a vote for a 25bp hike in rates. Other members did share his fear for stubborn inflation but chose to keep rates steady for now.

In their separate Financial Stability Report, there was little in the way of surprise with the focus firmly on the sovereign debt crisis gripping Europe.

The new Office for Budget Responsibility (OBR) pre-empted the emergency budget in noting the 2010-15 deficit would be £22bn lower than originally forecast. The OBR forecast growth at 1.3% this year with 2.6% and 2.8% growth expected in 2011 and 2012 respectively.

The Budget itself was well received by ratings agencies and therefore financial markets with spending cuts making up 77% of proposed debt reduction while the 23% balance comes in the shape of tax rises. Time will tell if the measures will have an adverse impact on economic recovery.

Sovereign debt fears continued to plague the Eurozone with Spain in particular coming under the spotlight throughout June. A series of austerity measures announced by core EZ nations has gone some way to smoothing the waters but the potential impact on growth remains.

Data wise, PMI releases were broadly stable close to recent highs. House prices across various surveys were mixed, mortgage approvals were a touch stronger than expected although money supply remains weak. Production data disappointed with both industrial and manufacturing figures declining in April. Public sector deficits for May were better than feared. CPI fell back to 3.4% from 3.7% in April May while retail sales came in stronger than expected although a large downward revision to April’s figure kept year on year growth in check. Labour data on balance was encouraging with unemployment down at notch at 7.9%. The final revision to Q1 GDP was delayed to July 12th amid concern over the reliability of the data with the Office for National Statistics (ONS) blaming a ‘potential error.’

The pound has made significant headway against the dollar over the last six weeks or so and we currently sit around 10 cents off the 1.4235 low seen in May. There is a significant band of resistance sitting between 1.5205 and 1.5305 that looks likely to provide a strong barrier to a return to the 1.5525 high from April. Support now sits at 1.4880/40 and 1.4780/25. Below this latter level would heap the pressure on once more bringing 1.4350 and 1.4225 back into play. 

Against the euro, the pound has enjoyed a more prolonged period of strength with steady gains since the 1.0930 low in March taking us to a recent high of 1.2395. The move back above the psychological 1.2000 level, for the first time since December 2008, is encouraging although we have tailed off just ahead of a tough area of resistance at 1.2450/1.2500. Only above here suggest potential to push up to the next level at 1.2750. The psychological 1.2000 level then last year’s 1.1905 high now provide good support for 1.1800 and 1.1625.

Interest rates                0.50%
Unemployment Rate    7.9%
CPI Inflation                    +3.4 y/y to May 2010
GDP                                  0.3% q/q to March 2010

GBP - EUR

 

GBP - USD

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