Sterling takes a tumble as things look up in zee Eurozone
Week commencing Monday 21st January 2013
Overriding Market Themes
Sterling has continued to weaken against the Euro, breaking below the 1.20 level for the first time since early April 2012. The concerns over the UK’s AAA credit rating and its relationship with the European Union have played their part, as has the dismal economic data posted by the country in recent weeks. The drop in strength against the Euro was echoed against the Dollar, as cable plummeted 0.3% on Thursday to 1.5956, the lowest level since the 23rd November. Many believe that 2013 will be the year of a depreciating pound, with some estimating that Sterling could even return to the mid 1.12’s by the end of the year. We are slightly more optimistic of dear old England, but certainly with the UK economy very soft, it will be a testing time for Sterling. Of course, in the currency world there is always a positive embedded in a negative, and hopefully any depreciation in the pound will help our beleaguered export market expand.
In even more bad news for the UK, retail sales fell in December at a seasonally adjusted rate of 0.1% against the previous months. The statistics from the ONS indicated that this was the slowest annual growth rate for a December since 1998 (with the exception of December 2010, when sales were hit by heavy snowfall). These figures will fly in the face of believers of the consumer led recovery for the country, and only serves to increase fears of a triple dip recession looming its head. No wonder this unfortunate state of affairs has led to the insolvency of some of the countries most loved high-street institutions, Blockbuster and HMV. Let us hope the country does not follow suit!
Everything seems a little rosier across the Atlantic in the US of A. Economic activity in the US has picked up pace since November, according to the Federal Reserve’s latest Beige Book. The survey of the 12 Federal Reserve Districts said there has been a modest rise in retail sales, however manufacturing remained sluggish. It also stated that fear of the fiscal cliff continued to effect consumer confidence, although auto and property sales seemed to be making a slight comeback. Whatever they are drinking over there, we could use some of it!
Italy may need at least 9 billion Euro of additional budget measures in 2013 to meet its deficit targets as a worsening recession hurts tax revenues and fuels unemployment costs. This comes as the Bank of Italy cuts its forecast for the economy, predicting a contraction of 1% this year compared to a previous forecast of a 0.2% drop, with the global slowdown and weak domestic demand mainly to blame. As the Eurozone’s third biggest economy continues to struggle to get its house in order, it continues to drag a rapidly more confident economic zone back into the global limelight. Perhaps more draconian measure will be needed to cut the countries 2 trillion euro debt? Tackling tax evasion, a chronic problem within the countries mafia culture, sounds like a good place to start!
GBP This Week
We start off the week with the Claimant Count Change on Wednesday. The markets are hoping for another good result in the upcoming reading, with a forecast of a small gain of 0.3 thousand. The Unemployment Rate is expected to remain at 7.8% for the third straight month. We then move to the MPC meeting minutes, which hopefully will show some discontent in the committee and signal an increase in Quantitative easing may be on its way soon. Finally we move to Friday’s Preliminary GDP release, which is without doubt the highlight. After three weak readings, the Q3 reading was outstanding, jumping by 1.0%. This was the best performance since Q2 of 2010. However, the markets are expecting a sharp decline this time round, with an estimate of -0.1% at the end of the week. It seems that with the UK economy struggling under these strict austerity measures, and the US likely to face more fiscal challenges in February, the potential for the pound to sustain any upward momentum against either the Dollar or the Euro is unlikely.
USD This Week
We start the US data set with Existing Home Sales on Tuesday, with another increase of 5.11 million expected this month, despite ever increasing prices. Moving on to Thursday, US Unemployment Claims dropped sharply by 37,000 to 335,000 last week, reaching their lowest level in five years. This exceptionally low figure could be due to a seasonal adjustment, but it seems the overall picture points to an on-going recovery trend. With this in mind, we are looking for an increase to 361,000 now. Finally, US New Home Sales on Friday should point upwards as Americans bought 4.4% more new homes in November, the fastest pace in more than 2 years. This rise continues to point towards a stern recovery of the US housing market, and we anticipate a further rise to 383,000 this month.
EUR This Week
The Eurogroup meetings start the week off on Monday, with further insight being sought after on the negotiations between the Troika and the Cypriot government over bailout terms. Moving to Tuesday, we concentrate on German ZEW Economic Sentiment, which is expected to improve further in January, for the second consecutive month, from 6.9 to 15.0, which would be its highest level since April 2012. This follows Mario Draghi speaking at the New Year’s reception on the Industrieund Handelskammer. Finally, Eurozone PMI is likely to move sideways in January, driven by conflicting forces. The very strong momentum in risk appetite should support overall business sentiment, with growing signs that the bulk of the confidence crisis is behind us. At the same time, however, actual evidence of a rebound in economic activity has been scarce. Expect the figure to come in at roughly in line with December’s figure.
In Other News
The snow is here, and it seems the country is coping just a little bit better than usual with it! Hundreds of schools are closed though, and rail, roads and flights continue to be effected on the fourth day of severe wintry weather. That said, although I can walk to work and therefore cannot use the quintessential ‘I am snowed in’ excuse, there is nothing better than seeing the English countryside in winter. It does well to remind me that although things are bad in this country, there are some things that will remain great whatever! In slightly less important news (at least for us!), Barack Obama is to be inaugurated as President of the United States for the second time on Monday. Hundreds of thousands are expected in Washington for the event, which will feature music from Beyonce, parades, black tie balls and tight security. Unfortunately, our guest passes must have been lost in the post, but we do with the president all the best in leading the free world for a further 4 years.
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