The pound bounced to a two week high against the euro yesterday, benefiting from a lack of UK economic data and worries that Italy and Spain were being slowly but surely dragged into the sovereign debt crisis which has afflicted the euro zone periphery in the last 14 months.
The euro fell sharply across the board, losing over 2% against the Swiss Franc and Japanese Yen (both seen as safe haven currencies) and was also sharply lower against the US dollar in one of its most dramatic one-day declines in almost a month.
Euro Zone official held an emergency meeting to discuss tackling Europe’s sovereign debt crisis amid speculation that Greece’s second financial aid package could fall through. Officials were also under pressure to sooth market nerves about the debt crisis engulfing Italy and Spain as their borrowings costs reached euro era highs.
Whilst the pound benefited from the euro zone’s woes, the surge in risk aversion helped the US dollar to strengthen to a five week high against the pound.
In data out this morning, the British Retail Council (BRC) reported that the retail sales environment improved slightly in June, but conditions remain tough due to consumer caution and shops are having to launch sales to draw in customers. Total sales were up by 1.5% during June, having fallen by 2.1% in May.
“Sales continue to be under huge pressure from the squeeze on disposable incomes produced by rising inflation and low wage growth,” BRC director general Stephen Robertson said.
In a separate report, the British Chambers of Commerce reported that the UK economy is recovering too slowly and more support needs to be provided for private sector firms. The group’s survey for April to June was more positive than the previous three months, but the BCC said that the UK economy was “fragile”.
Another survey suggested confidence among UK manufacturing firms had fallen to its lowest level in two years. Accountants BDO blamed the fall on weak demand domestically and from overseas.
This underlines just how vulnerable the pound is and how utterly dependent it is on ‘bad news’ from the other side for the pound to record any gains against another currency. Until there are sure signs of a sustainable economic recovery in the UK and the likelihood of the Bank of England increasing UK interest rates, now not forecast until the second quarter of 2012, we will continue to see the pound only record meaningful gains when there are problems with another currency.
Commentary by Tony Redondo
“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”
