A Messy Week For Sterling

UK data give no cause for new concern. Bank of England cautious about recovery. Euro torpedoed, eventually, by weak first quarter GDP data.


It took a while to gain traction but the pound got its act together in the second half of the week. It came near to €1.1250 late on Friday and was pushing higher through that level when London opened this morning. A potentially upbeat start to Sterling's week came with a report from the Organisation for Economic Co-operation and Development. This members-only club announced that Britain was one of only a handful of countries that would soon see a turnaround - or at least a bottom - in their economic performance. France, Italy and China were also on the list while the US, Japan and Germany faced further "sharp falls" in output.


Britain's residential housing sector delivered unusually good news on three sides. The Royal Institute of Chartered Surveyors' House Price Balance improved by a dozen points to -60%; nowhere near good but a lot better than in previous months. The Council of Mortgage Lenders said mortgage approvals had risen by 29% in March. Although the number was still a third less than a year earlier it was a welcome increase. This morning the Rightmove property website reported a 2.4% rise in sellers' asking prices.


Asking prices are very different from selling prices but the upswing in sellers' optimism was seen as a plus for the UK economy.


Negatives for sterling came with another rise in unemployment, this time to 7.1%, and a realistic assessment of the economy from Bank of England Governor Mervyn King. He said the economy would rebound and that it might take a while to get back to trend growth. Nothing obviously wrong with that. He said that it was impossible to predict how long it would take for the banks to resume full-scale lending activities.


Also true. However, the market chose to focus on Dr King's refusal to commit to untrammelled expansion from here on in. That sentiment weighed on sterling for the rest of the week.


The euro's week was equally as nervous as that for sterling. National industrial production figures from Italy, France and Germany were all negative and the Euroland numbers on Wednesday showed a 2% monthly decline in March with output more than 20% down on a year ago. It made Britain look good.


Friday's data for first quarter GDP extended that perception. Euroland's economy shrank by 2.5% in Q1 and by 4.5% in the 12-month period. The equivalent UK figures were -1.9% and -4.1%.No longer are the commentators banging on about Britain's economic underperformance. The evidence just isn't there. Buyers of the euro should place a stop order, somewhere above their threshold of pain, and bide their time.

Source: Moneycorp