The Pound Will Be More Resilient Now. By Nicholas Hastings
Another rally up towards $1.60 is unlikely, but sterling will prove a much more resilient currency than initially expected.
Not only is the U.K. economy in better shape to withstand the fiscal austerity storm that is about to break over its head, but continued investment fears of a sovereign default across the channel and a lack of confidence in the U.S. recovery means that the euro and the dollar are even less attractive alternatives.
Sterling bulls had long assumed the post-election party for the pound was over.
The pound had bounced all the way from nearly $1.40 to nearly $1.60 as the new coalition government led by the Conservatives promised a reduction in the massive budget deficit that threatened to undermine the country's first-class credit rating.
However, draconian public sector spending cuts and the higher taxes announced in the emergency budget in June soon injected some economic reality.
By early August, buyers were losing their appetite for the pound as the prospect of prolonged austerity brought speculation that the Bank of England would have to extend quantitative easing.
This week has proved, though, that those fears both about the economy and about early quantitative easing were overdone.
See how the pound is holding onto its gains:
For a start, minutes of the last Bank of England meeting showed that while the central bank may well have discussed introducing more liquidity, at least one member of its monetary policy committee meeting remains convinced that the bank should be starting to tighten, not loosen, policy.
Further evidence that the U.K. is more robust than markets expected came from a 1.1% rise in retail sales last month, nearly double the 0.6% increase that had been forecast. The data is remarkable in that it showed consumer confidence remaining strong in the month after the emergency budget was unveiled.
This followed last week's news that the U.K. jobs market is also proving more robust than anticipated.
On top of that, the country's finances may not be quite so dire after all, with the public sector net borrowing for July shrinking even more than economists had calculated.
Of course this doesn't mean that the U.K.--or the pound---is off the hook.
Far from it. Savage spending cuts are expected to start biting this autumn and early next year.
There are already signs of a major slowdown emerging in other economic figures released this week, including the slowest rate in M4 money supply growth since the data was first collected in 1983 and a sharp fall in mortgage approvals, that will hasten the recent downturn in house prices.
This could still mean another dose of quantitative easing from the Bank of England further down the line, especially if the recent spike in consumer price inflation is as short-lived as the central bank predicts.
However, this doesn't mean that the pound will lose all its attraction.
On the contrary, over the last week or two, developments in the U.S. and in the euro zone have reduced the attraction of the dollar and the euro as alternatives to sterling.
In the case of the dollar, the Fed may not be rushing into further QE either but its decision to preserve current levels of liquidity shows that the central bank is hardly confident in an early economic recovery.
Similarly, in Europe, hopes that the sovereign debt crisis is passing didn't last long. Several peripheral debtors may have held successful bond auctions over the last week or two but the cost of insuring Greek debt remains at sky-high levels, proving that investors still see Greece as a basket case.
As the Greek economy shudders to a halt under the pressure of its own austerity package, the chances of a Greek default are climbing and the attraction of the euro relative to sterling is once again on its way down.
Early Friday, the pound was under pressure like most other so-called high-yielders as risk appetite declined after the U.S. reported a sharper-than-expected rise in jobless claims last week and a dive in the latest Philadelphia Fed index this month.
As global stock markets fell back, the pound declined to $1.5565 from $1.5606 late on Thursday in New York.
However, the euro bounced back from an earlier decline to trade at $1.2826, up a little from $1.2820 late on Thursday. It was also up at Y109.47 from Y109.40 while the dollar was up at Y85.34 from Y85.29 as the Japanese government appeared to have eased pressure on the Bank of Japan to take action against the strong yen right away.
Economics Minister Satoshi Arai said the government had no specific plans for the Bank of Japan despite speculation earlier this week that the central bank is about to ease monetary policy even further.
Not only is the U.K. economy in better shape to withstand the fiscal austerity storm that is about to break over its head, but continued investment fears of a sovereign default across the channel and a lack of confidence in the U.S. recovery means that the euro and the dollar are even less attractive alternatives.
Sterling bulls had long assumed the post-election party for the pound was over.
The pound had bounced all the way from nearly $1.40 to nearly $1.60 as the new coalition government led by the Conservatives promised a reduction in the massive budget deficit that threatened to undermine the country's first-class credit rating.
However, draconian public sector spending cuts and the higher taxes announced in the emergency budget in June soon injected some economic reality.
By early August, buyers were losing their appetite for the pound as the prospect of prolonged austerity brought speculation that the Bank of England would have to extend quantitative easing.
This week has proved, though, that those fears both about the economy and about early quantitative easing were overdone.
See how the pound is holding onto its gains:
For a start, minutes of the last Bank of England meeting showed that while the central bank may well have discussed introducing more liquidity, at least one member of its monetary policy committee meeting remains convinced that the bank should be starting to tighten, not loosen, policy.
Further evidence that the U.K. is more robust than markets expected came from a 1.1% rise in retail sales last month, nearly double the 0.6% increase that had been forecast. The data is remarkable in that it showed consumer confidence remaining strong in the month after the emergency budget was unveiled.
This followed last week's news that the U.K. jobs market is also proving more robust than anticipated.
On top of that, the country's finances may not be quite so dire after all, with the public sector net borrowing for July shrinking even more than economists had calculated.
Of course this doesn't mean that the U.K.--or the pound---is off the hook.
Far from it. Savage spending cuts are expected to start biting this autumn and early next year.
There are already signs of a major slowdown emerging in other economic figures released this week, including the slowest rate in M4 money supply growth since the data was first collected in 1983 and a sharp fall in mortgage approvals, that will hasten the recent downturn in house prices.
This could still mean another dose of quantitative easing from the Bank of England further down the line, especially if the recent spike in consumer price inflation is as short-lived as the central bank predicts.
However, this doesn't mean that the pound will lose all its attraction.
On the contrary, over the last week or two, developments in the U.S. and in the euro zone have reduced the attraction of the dollar and the euro as alternatives to sterling.
In the case of the dollar, the Fed may not be rushing into further QE either but its decision to preserve current levels of liquidity shows that the central bank is hardly confident in an early economic recovery.
Similarly, in Europe, hopes that the sovereign debt crisis is passing didn't last long. Several peripheral debtors may have held successful bond auctions over the last week or two but the cost of insuring Greek debt remains at sky-high levels, proving that investors still see Greece as a basket case.
As the Greek economy shudders to a halt under the pressure of its own austerity package, the chances of a Greek default are climbing and the attraction of the euro relative to sterling is once again on its way down.
Early Friday, the pound was under pressure like most other so-called high-yielders as risk appetite declined after the U.S. reported a sharper-than-expected rise in jobless claims last week and a dive in the latest Philadelphia Fed index this month.
As global stock markets fell back, the pound declined to $1.5565 from $1.5606 late on Thursday in New York.
However, the euro bounced back from an earlier decline to trade at $1.2826, up a little from $1.2820 late on Thursday. It was also up at Y109.47 from Y109.40 while the dollar was up at Y85.34 from Y85.29 as the Japanese government appeared to have eased pressure on the Bank of Japan to take action against the strong yen right away.
Economics Minister Satoshi Arai said the government had no specific plans for the Bank of Japan despite speculation earlier this week that the central bank is about to ease monetary policy even further.
Bloomberg TNI FRX POV
Reuters USD/DJ
Thomson P/1066 or P/1074
(Nick Hastings has covered the foreign exchange markets and industry for over 20 years. Apart from his written commentary and analysis, he also appears on Fox Business News and CNBC television in Europe, Asia and the U.S. He can be contacted on +44-20-7842-9493 or by email: nick.hastings@dowjones.com)
- 20 August |
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