By Jon Beddell
Foreign Currency Market Update – GBP / USD Update
Sterling has been making steady gains against the US dollar since stock markets began their rebound around August 11th. The dollar had strengthened as stock markets tumbled and investors scrambled for safe havens for cash, but the Pound has been able to quickly trade up to new 3 month highs as markets stabilised. The underlying trend is therefore for Sterling to do better against its US counterpart, and this should continue as long as stock markets don’t enter a new panic phase.
There were a few notable data items out last week. UK consumer price index for July edged higher to 4.4% from 4.2% for June. However, the interest rate makers at the Bank of England are firmly on the fence and in light of the economic softness evident elsewhere it will take more than this to push them off, especially while wage growth remains at a below expected 2.2% when bonuses are excluded. Public sector net borrowing fell to just £20m in July as a windfall levy on banks’ balance sheets boosted receipts by £660m in the month, and lower local spending reduced outflows. In the US both industrial production and consumer prices were higher than expected (generally positive for USD) but the dollar was not able to keep up with Sterling.
More than economic stat’s, markets movements are being driven by attitudes to risk. Stock prices remain volatile but we’ve not seen new lows for nearly two weeks, leading to a sense of relative calm. In this environment the Dollar weakens as investors push money toward higher yielding (and higher risk) assets. However, should the markets resume their plunge this could quickly reverse and the Dollar would probably strengthen. Given the high level of uncertainty and the fact the Sterling/Dollar rate is now trading within a couple of cents of 18 month highs, it would be prudent to cover at least half of any requirement now, using a forward contract if necessary.