Moneycorp Update

Except for a brief upward blip at the start of the week the Pound had another five days of almost uniquely downward movement against the Dollar. From $1.9150 on Monday it had fallen to $1.8550 by Friday morning. A bounce took it back above $1.87 but it was trading at $1.8650 when the London market opened today.

It was not a good week for the Pound. It started badly and got worse. As usual, the market did not find it hard to identify weaknesses in the UK economy. Picking out the good bits was more difficult. The Producer Price Index showed a slight narrowing of the gap between manufacturers' costs and the prices charged at the factory gate but the positive effects did not extend beyond the manufacturers themselves. Britain's trade deficit deteriorated. The British Retail Consortium reported high street sales falling by 1 per cent in the year to July and the Royal Institution of Chartered Surveyors said house sales were down by an unhealthy 40 per cent from a year ago. Rightmove reported that the average asking price for houses was down by 5 per cent from a year ago; forced sellers are becoming more aggressive with their pricing.

The corn-curer was Wednesday's quarterly Inflation Report from the Bank of England. It set out a dismal picture of rising inflation and unemployment together with falling activity and house prices. Presenting the report, governor Mervyn King spoke of "the biggest financial dislocation since the Second World War" and "a feeling of chill in the economic air." Stopping just short of actually mentioning the R-word Mr King said there was "bound to be... a quarter or two of negative growth."
The market instantly spotted his error of omission and the Pound lost a cent before you could say "recession."

The Dollar meanwhile led a charmed life, building on the previous weeks' gains against almost every currency on the planet. For most of the week the Dollar's rally was driven less by the data, more by the perception that its fortunes had taken a change for the better after seven or eight years of decline. As discussed here last week, two broad factors have combined to change long-held opinions about the US currency: commodity and energy prices are going down instead of up and economic data from the rest of the developed world are showing that the economic slowdown is no longer confined to the Anglo-Saxon nations.

Investors are in two minds about whether US interest rates will be going up in the near future but they are generally agreed that they will rise eventually. The same cannot be said of most countries. US inflation data last week showed prices rising at the fastest rate for 17 years while the equivalent measure for the Euro zone had prices falling slightly between June and July. The economic signs in the last couple of weeks suggest upside potential for the US economy while the picture worsens in Europe. Things might not pan out like that in the near future but the FX market needs a new champion and it might be the Dollar's turn to take that role. After telling customers for ten years to sell the Dollar, Goldman Sachs has said in a research note that "it is time to say goodbye to our long-held Dollar bearish stance."

The Dollar has been on a roll for a month now. It has the potential to do better in the future but it would not be a surprise to see some consolidation of those gains, if not a correction, in the short term. Buyers of the Dollar should take advantage of any such reversal: the chance of Sterling going back above $2 is remote.

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