The Macro Trader’s view:

On the 30th July, 4 weeks ago, we wrote a piece entitled “How vulnerable is Sterling”, our conclusion at the time was that we thought it not very vulnerable against the Euro, since we judged, based on available macro economic data available at that time, that the UK looked closer to emerging from recession, than did the Euro zone, and in some respects the UK economy compared favourably against the US economy too.

So what has changed over the last few weeks?

The Euro zone economies of France and Germany have since released Q2 GDP data showing they have emerged from recession, moreover, other data:
– The Euro zone PMI composite survey,
– The German PMI Services survey,
– Both German and Euro zone ZEW surveys, and- More recently German IFO.

have shown improvement which lends support to the surprisingly better GDP data that was initially taken not only with disbelief, but discounted on the grounds the improvement would prove unsustainable.

In the US while data has remained mixed, with:- Retail sales undershooting consensus,
– CPI & PPI falling further than expected, and
– The recent ISM non-manufacturing survey disappointingly coming in below consensus,

There have been some key positives:
– Non-farm payroll has continued to moderate showing a steadily declining pace of job destruction,
– The ISM manufacturing survey continues to improve, but more importantly
– The Housing market has shown further important signs of recovery with both Existing and New home sales coming in higher than consensus over the last week, indeed New home sales, a GDP component, rose by 9.6% month on month as reported only yesterday.

Furthermore, the Fed’s Lacker said today “the economy (US) is levelling out and housing is no longer a drag.

While all of this explains the international environment, what has changed in the UK?
The Bank of England has surprised the market several times in the last few weeks by 1st resuming its QE after suspending it the previous month, but more importantly, at the same time increasing it to £50.0B, this hit Sterling.

Then the Bank of England quarterly inflation report painted a picture of subdued inflation over the two year target period, based on current interest rates, which surprised both interest rate traders and currency dealers and undermined the Pound.
But if that wasn’t enough, the recent MPC minutes revealed that Governor King and two colleagues wanted to increase the QE by a larger £75.0B, indicating the Bank may not yet be done with easing and this too depressed Sterling.

But probably the biggest shock came today when quarterly investment data was reported to have shrunk by 10.4% in the 2nd quarter and by 18.4% year on year. This not only explained the shock Q2 GDP contraction of -0.8% released a few weeks ago but probably makes any upward revision unlikely.However the UK economic picture isn’t all black, retail sales continue to expand and the housing market continues to confound the pessimists by showing clear signs of revival.

But as for the Pounds fortunes, they look less optimistic than they did 4 weeks ago, but much of the negative UK data quoted above is already historic, the Pounds fortunes will be decided by the run of data as we move forward and there are still strong indications that the economy could emerge from recession later this year, so short/medium term Sterling looks vulnerable, but longer term it should stabilise and gradually recover.

Mark Sturdy,John Lewis
Seven Days Ahead

NB.No technical comment today, Mark Sturdy is on holiday.

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