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      GBP v Euro update 14.06.11

      UK ECONOMY GROWS BY 0.4% IN THREE MONTHS TO MAY

      Inflation pressures moderate. Sentiment swings against the euro again.

      The first half of the week saw sterling slide by nearly a cent; the second half saw a complete recovery, and more. When London opened yesterday morning the pound was a net one cent higher on the week.

      Another drought-ridden crop of UK economic statistics began with the British Retail Consortium reporting lower sales in May, after April's bank holiday boost. It ended with the revelation that UK industrial production had fallen by -1.2% in the year to April and by -1.2% in the month itself. It was not all bad news though. Halifax reported a tiny 0.1% monthly increase for its house price index in June and offered a vaguely optimistic outlook; "Overall, we expect a moderate improvement in the economy during the remainder of 2011, which combined with continuing low interest rates, is likely to support housing demand. This should prevent a further marked fall in prices and help to stabilise property values later in the year."

      The scale of the moderation in that economic improvement was made clear by the National Institute for Economic and Social Research, with its estimate on Friday that the UK economy expanded by 0.4% in the three months to May. The trade figures were alright though, in a British sort of way. April's deficit was down to -4.4 billion from March's -4.5 billion. The producer price index showed a relaxation of the squeeze on manufacturers; the speed of their cost increases slowed from an annual 17.9% to 15.7%, while factory gate prices eased only slightly from 5.5% to 5.3%. For the month of May, factory gate output prices were up by 0.2%; input prices (costs) fell by -1.2%.

      Thursday's Monetary Policy Committee (MPC) meeting was every bit the non-event it had been hyped up to be. Nothing changed and nobody said anything. Not until 22 June will investors discover from the minutes of the meeting who voted for what. The best guess is that the departure of Andrew Sentance from the committee will have changed the voting pattern from 9-3 in favour of no change to 7-2.

      Interest rates and Greece were the two drivers of the euro. Sometimes they cropped up together, sometimes separately. Their effect reached a climax on Thursday afternoon when the president of the European Central Bank (ECB), Jean-Claude Trichet held his monthly post-council-meeting press conference. Investors had expected no change to euro interest rates in June; what they were looking for was a sign that the next increase would come in July. Trichet gave them that sign when he uttered the magic words "strong vigilance" in the context of inflation.

      It might have been reasonable to expect the euro to strengthen on such news, but in fact it headed lower and continued to fall for the next 90 minutes of the press conference. First, it went down because there had been so many speculative long-euro positions in anticipation of the announcement. Investors were falling over one another in their hurry to sell the euro and take what profits remained on their positions. Second, it went down because the conference highlighted the problems that still confront the negotiations about Greece's next bailout.

      Journalists at the conference could not give two hoots about ECB monetary policy; they wanted to hear about how the bailout would be handled and what it might entail. They were relentless in their interrogation of M Trichet. His responses showed just how little control he has over what is essentially a political process. The poor chap did his best to defuse the situation but it was clear his heart was not in it. The ECB is just as dubious about the plan as is the rest of the world. M Trichet tried to reassure his audience that there would be no restructuring of Greek debt, no default and no losses for bondholders. The press and the investors watching on television could not work out how such a miracle might be wrought.

      That concern will continue to nag at the euro this week. There will be some distraction from Euroland industrial production, employment and trade balance figures. The most important ecostat will be Thursday's inflation figure. Although the ECB expects inflation to fall back to target next year that does not mean it will be as patient as the Bank of England in waiting for it to happen. Higher Euroland inflation means higher euro interest rates.

      The two important UK statistics will be for consumer price index inflation and employment. The former loses most of its theoretical clout because everyone is aware that the MPC will keep interest rates as low as it can for as long as it can. The latter is critical to the economy and the currency; without jobs growth there can be no spending growth and no economic growth. Making up the numbers will be the RICS house price balance, consumer confidence (Nationwide's version) and retail sales.

      Another week, another reversal in sentiment towards the euro. In the last 12 months, sentiment towards the currency has changed direction half a dozen times and could do so again at the drop of a hat if the Greek goalposts move again (which is almost guaranteed). Buyers of the euro should fix a price for half the money they will need with a forward purchase and those with a short time horizon should buy at current levels.
      Last edited by cerberus1; 16-06-2011 at 01:15 AM.

    2. Moneycorp - Commercial foreign exchange since 1979