Sterling Strengthens Vs the Euro
Bundesbank head calls for continued monetary stimulus.
After falling on Monday and Tuesday the pound spent the rest of the week pointing higher. It only managed to add a single net cent but that can be considered a result given that, at its nadir, it was two cents below its starting point.
In forex spread trading, Sterling’s week got off to a slow start. It was not until Tuesday that the UK economy had anything to say for itself, with the consumer price index (CPI) figures. They were in line with expectations. CPI inflation slowed from 3.2% to 3.1% in July after prices fell by -0.2% on the month. Sterling was a net loser on the day against everything but not because of the CPI data, nor for any other immediately obvious reason. Equally lacking in reason was its rally the following day. Yes, the minutes of the August Monetary Policy Committee meeting provided the catalyst because they included no bad news, but sterling’s rise on Wednesday was as mysterious as its decline the previous day.
Monday’s Euroland CPI figures were close enough to forecast that they did not disturb investors. The headline inflation number (1.7%) and the core figure (1.0%) were exactly as expected. July’s -0.3% monthly price fall was slightly above the predicted -0.4% and thus vaguely positive for the euro. ZEW’s surveys of business confidence on Tuesday were a mixed bag.
For the euro zone as a whole the index of economic sentiment was five points ahead of forecast, 15.8 instead of 10.6 whilst, for Germany alone, the figure fell short of expectations. At 14.0 it was seven points lower on the month instead of the one point the market had factored in.
Euro zone construction output rose by 3.1% in the year to June but performance across Euroland was chequered and the vast majority of the growth – 2.7% – came in June alone.
The most unhelpful development for the euro was a comment by Axel Weber on Friday. Herr Weber is head of the Deutsche Bundesbank and current favourite to take over from Jean-Claude Trichet at the European Central Bank when M Trichet’s term expires next year.
People take him seriously. He is also quite a blunt chap. What he said last week was that the ECB should continue to provide monetary stimulus – quantitative easing if you like – at least until the first quarter of next year.
His comments drew attention to the disparity between what the ECB is doing – supplying cash – and what countries like Greece and Ireland are doing – turning off the tap. The EU and the ECB are putting a brave face on their problems but those problems are not going to evaporate any time soon.
In spread trading, the pound’s ascent against the euro is laboured but it is still going up. Last week’s low was a cent higher than in the week before.
Weekly update by www.moneycorp.com, Foreign Exchange since 1979.