Market Commentary
After steadily climbing throughout the early part of the session yesterday, sterling lost significant ground to the dollar after a rare speech about the recent poor dollar strength by Ben Bernanke, chief of the U.S. Federal Reserve at a press conference.
Mr Bernanke said US interest rates were “well positioned” for an economy facing both price pressures and threats to growth. “We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate,” he said, referring to the central bank’s goals of ensuring sustainable growth and low inflation.
“Talking up the dollar would mean the Fed could keep a check on inflationary pressures, allowing them to keep US interest rates on hold for longer,” said Adam Cole at RBC Capital Markets. “The Fed could be looking to actively use the exchange rate as a policy tool.”
The comments caused a positive response for the dollar suggesting that unlike the UK their central bank is in fortunate position where it has a few cards to play with balancing inflation and recession. The pound put up very little resistance after just managing to fight back from a 2 week low on Monday as poor data relating to the housing and banking sectors continued to confirm the UK’s weak economic outlook.
On Monday, Bradford and Bingley, Britain's largest buy-to-let mortgage lender issued a statement showing a sharp drop in profits and announced the resignation of its CEO. Throughout the course of Monday’s trading B&B shares had lost almost a quarter of their value.
Mondays run of UK data continued with weak mortgage and manufacturing figures and building activity dropping at the sharpest pace in the last decade as falling property prices and tightening credit restrictions caused havoc in the industry. Ratings agency Fitch also said that as time goes on more banks would start to feel the pressure.
It is quite apparent that Britain's economy is currently caught between a rock and a hard place with slowing economic growth and rising price pressures, while consumers are still feeling the pinch of the global credit crunch which now enters its tenth month.Analysts and investors won’t be paying quite so much attention to tomorrow’s interest rate decision as usual. The Bank of England’s hands are tied so it is very unlikely that they will change the current interest rate of 5%
Focus turns to the release of the purchase manager index (PMI) service data from the Chartered Institute of Purchasing & Supply today. This provides an insight to the condition of sales and employment in the UK. Traders want the highest possible reading, any reading above 50 shows economic expansion, below shows contraction. It’s a fairly safe bet given the state of the economy today’s figure, if above 50 will only be by a very small margin.
"This wave of weakness in terms of the data is likely to continue for the time being," said David Woo, head of currency research at Barclays Capital.
As predicted in previous reports, we are encountering a wave of volatility for all currencies. Buying at the right time is crucial to avoid being bitten by intermittent falls in your particular currency. At IFX we can provide you with up to date market data helping you make an informed decision when to trade or perhaps when not to trade.
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