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The release of the latest Consumer and Retail Price Indexes for December, the quarterly assessment of our economic growth (GDP) and the motivation behind the Bank of England’s monetary policy decisions at the start of January have all caused significant volatility for the pound versus the euro since the New Year, but have ultimately seen a gain for sterling. Price increases exceeded forecasts by 0.3% on both RPI and CPI, and despite a late surge in retail sales over the Christmas period it would appear that the UK economy is still the lame horse of the global recovery because of risk aversion and tighter regulation in the financial sector.

Cold Front Still Effects Credit:

In the real economy, and as far as the figures are concerned, domestically we are crying out for more flexible lending from the banks, and this has kept both small businesses and important economic sectors from featuring prominently in the recovery. On 26 January preliminary GDP figures were released revealing that although Christmas and the cold snap are over, credit is still frozen, consumers are more cautious about frivolous spending and our dependency on financial services and liquidity has not changed.

The mid-month Bank of England Monetary Policy Committee Minutes showed a 9-0 vote in favour of an unchanged monetary policy. The tone was more positive than in December. Reference was made to the upturn in the global economy, which was largely Asian driven, although there was evidence of stronger US growth in the fourth quarter of 2009. At the beginning of January the Agents Summary of Business Conditions made reference to a very gradual improvement in business sentiment, in part due to a recovery in export demand, and it is this export demand that should drive the pound higher over the first half of 2010.

The number of people claiming Jobseeker’s Allowance in December 2009 was fewer than expected, which is encouraging news, but it did not translate into more spending by the newly employed consumer.  An increase in prices, the level of unemployment and positive news from the Bank of England prompted the strengthening of the pound at the start of the month, but these key economic indicators do not add up to or convey the whole of our economy. The fact that the pound rallied just before GDP figures came out, and fell by over a cent shows that we are still in a very fragile position economically.  Although sterling has the potential to push higher against the euro in February, we still run the risk of tripping up if Quantitative Easing is increased and the banks remain frigid.

With the early weeks of February seeing the release of a huge amount of potentially positive information, we could see the 1.1650 rate genuinely tested during February.

Hasta la proxima!

Please feel free to contact me at keith.s@currenciesdirect.com and I will reply to all your questions promptly.

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