News Column

Is Sterling running out of energy?

June 14, 2014



Charles Purdy

Sterling's trend against the euro is one of sterling strengthening while against the US dollar it is moving sideways. Over the course of last week sterling only gained a little bit of ground against the euro, pushing above the 1.23 level by the end of the week and thereby maintaining the upward trend. Following the European Central Bank announcement last week, we even saw sterling hit the 1.24 level, a sixteen-month high, albeit sterling soon gave back the gains. Against the US dollar the trend is, as mentioned, sideways with a range from 1.67 to 1.69.

Economic releases in the week ahead are not as many as last week but could have a significant bearing as they will either underpin the confidence in the UK economy or undermine it. Tuesday sees the release of industrial and manufacturing production figures which are expected to show continuing growth in the UK economy. In fact, if the industrial production figures hit expectations, industrial production will hit a post crisis high. The main economic event for sterling will be on Wednesday, with the release of the unemployment rate. After dropping below 7 percent earlier in the year, this important indicator of economic strength is expected to fall further to 6.7 percent. Therefore, if these releases are as expected and we don't get any major shocks from elsewhere it seems reasonable to assume that the sterling trends noted above will continue for the time being.



Any more surprises from the ECB this week?

After the notable spike in euro rates that we saw on Thursday, the single currency traded within a narrower range on Friday. As European Central Bank (ECB) President Mario Draghi's decisions on Thursday were largely priced into the market, they did not cause great euro weakness. Going forwards, however, the impact of the change in policy will have a strong bearing on the strength of the eighteen-nation currency.

Not a lot of data is in store for us this week, so reaction and speculation are likely to determine euro rate movements along with events elsewhere.

Additionally, the ECB Central Bulletin is set to be released and may incite market chatter and rate movements as it reveals the statistical data taken into account when making the decisions from the most recent meeting.



Employment data helps the US dollar

The US dollar ended last week with some slight gains in key areas, thanks to encouragement from the labor market. The non-farm employment change showed that US employers added jobs last month, providing further evidence that the economy is recovering. However, this figure was relatively close to estimated levels, despite Wednesday's independent version missing its expected level, and as such failed to have as large an impact, as is often the case. Alongside this, the unemployment rate held no surprises as it held at its record low, but gave continued hope of an interest rate increase sooner than currently being predicted.



Charles Purdy is director of Smart Currency Exchange, London.


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Source: Arab News (Saudi Arabia)


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