The UK economy has officially emerged from a deep recession, but is it really smooth sailing ahead now? With stronger than expected manufacturing figure released this week it would appear that there has been some effect of the Bank of England’s QE program, but the central bank is now faced with the issue of weaning the UK economy off of this artificial stimulus. Britain has exceeded expectation in areas like manufacturing and price are rising on the high street, but house prices and our services sector have yet to catch up with the levels of growth being experiences elsewhere, which means that the Bank of England cannot afford to loosen its grip on the weak pound just yet.
Some analysts have suggested that the only way the UK is to avoid a Greek or Spanish style economic crisis would be to increase income tax by 10%, VAT to 20% and the privatisation of the health service. Although there is always a threat of the double dip, it must be remembered that Greece and Spain had issues because of their ability to finance their debt. As the head of sovereign risk strategy at HSBC pointed out the cost of insuring a British government bond (gilt) means that there is ‘zero percent’ chance of Britain defaulting on her loans. Credit may be slow moving domestically, but internationally our debt is still an appealing investment.
Arguably the most important dates over the next two months will be 10th February and 15th March because on these days are scheduled for the Treasury’s Inflation Report Hearings. During these hearings the BOE Governor and several MPC members testify on inflation and the economic outlook before Parliament’s Treasury Committee. The hearings are a few hours in length and can create market volatility for the duration. Especially noted are the direct comments made about the currency markets; BOE MPC members vote on where to set the nation’s key interest rates and their public engagements are often used to drop subtle clues regarding future monetary policy, such as Quantative Easing.
If the MPC’s comments are more ‘hawkish’ than expected we would expect a positive improvement in the value of sterling. Hawks carefully monitor and control economic inflation through interest-rate adjustments and monetary-policy controls. In general, hawkish investors prefer higher interest rates in order to maintain reduced inflation. With inflation over 1% above the 2% target the hawks will vie for an increase in interest rates if consumer spending remains low, which would make investment in the UK and lending more appealing, but could stunt domestic borrowing because of an increase in costs to the consumer and therefore tighten up the property market.
Please feel free to contact me at keith.s@currenciesdirect.com and I will reply to all your questions promptly.
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Hola amigos!
The release of the latest Consumer and Retail Price Indexes for December, the quarterly assessment of our economic growth (GDP) and the motivation behind the Bank of England’s monetary policy decisions at the start of January have all caused significant volatility for the pound versus the euro since the New Year, but have ultimately seen a gain for sterling. Price increases exceeded forecasts by 0.3% on both RPI and CPI, and despite a late surge in retail sales over the Christmas period it would appear that the UK economy is still the lame horse of the global recovery because of risk aversion and tighter regulation in the financial sector.
In the real economy, and as far as the figures are concerned, domestically we are crying out for more flexible lending from the banks, and this has kept both small businesses and important economic sectors from featuring prominently in the recovery. On 26 January preliminary GDP figures were released revealing that although Christmas and the cold snap are over, credit is still frozen, consumers are more cautious about frivolous spending and our dependency on financial services and liquidity has not changed.
The mid-month Bank of England Monetary Policy Committee Minutes showed a 9-0 vote in favour of an unchanged monetary policy. The tone was more positive than in December. Reference was made to the upturn in the global economy, which was largely Asian driven, although there was evidence of stronger US growth in the fourth quarter of 2009. At the beginning of January the Agents Summary of Business Conditions made reference to a very gradual improvement in business sentiment, in part due to a recovery in export demand, and it is this export demand that should drive the pound higher over the first half of 2010.
The number of people claiming Jobseeker’s Allowance in December 2009 was fewer than expected, which is encouraging news, but it did not translate into more spending by the newly employed consumer. An increase in prices, the level of unemployment and positive news from the Bank of England prompted the strengthening of the pound at the start of the month, but these key economic indicators do not add up to or convey the whole of our economy. The fact that the pound rallied just before GDP figures came out, and fell by over a cent shows that we are still in a very fragile position economically. Although sterling has the potential to push higher against the euro in February, we still run the risk of tripping up if Quantitative Easing is increased and the banks remain frigid.
With the early weeks of February seeing the release of a huge amount of potentially positive information, we could see the 1.1650 rate genuinely tested during February.
Hasta la proxima!
Please feel free to contact me at keith.s@currenciesdirect.com and I will reply to all your questions promptly.
Visit us in our Spanish offices in Costa del Sol, Costa Almeria, S. Costa Blanca and N. Costa Blanca
Telephone: UK 0845 130 8148 • SPAIN 902 310 444 • Email: costadelsol@currenciesdirect.com • www.currenciesdirect.com
Hola amigos!
The week began with significant gains for sterling against the euro on the back of last weeks push beyond the key 1.13 level.
Tuesday saw the release of the previous month’s consumer and retail price indexes. The data, which exceeded forecasts by 0.3% on both surveys, indicates prices increased for December. This in itself was not unexpected, but it does put pressure on the Bank of England to address the specter of inflation rising whilst interest rates remain at a record low.
The Bank of England Monetary Policy Committee Minutes showed a 9-0 vote in favour of an unchanged monetary policy in respect of both bank rate and quantitative easing. The tone of the MPC Minutes was fractionally more positive than in the previous month. Reference was made to the upturn in the global economy, largely Asian driven, although there was evidence of stronger US growth in the fourth quarter. Yesterday also saw publication of the Bank of England monthly Agents survey which places more emphasis on anecdotal evidence, including feedback from business executives. The Agents Summary of Business Conditions made reference to a very gradual improvement in business sentiment, in part due to a recovery in export demand. If this scenario is sustained, this would be positive for sterling.
January is traditionally a period of heightened activity in the insurance, re-insurance and fixed income sectors. Internationally this activity incentivizes traders holding strong currencies to capitalize on the arbitrage potential in other markets and traditionally London benefits as the largest trader in bonds and exchange traded derivatives.
Analysts assert that any reduction in the unemployment rate in 2010 is likely to be very gradual, but in December Jobless Claims (Unemployment Change), although generally viewed as a lagging indicator, returned far better figures than expected with claims down by 15,200; also the Unemployment Rate, a figure that relates to November, dropped back to 7.8%. The number of unemployed people is an important signal of overall economic health because consumer spending is highly correlated with labor conditions, which puts a lot of focus on the retails sales figures over the Christmas period, and serves to reiterate the significance of the Bank of England’s role as the manager of inflation. This week has ended with the release of December’s retail figures. Fortunately they were better than the month previously, however not as good as forecast which prompted a slight drop off in sterling to a low of 1.1442 for the morning’s trading.
Despite these numbers, no rate hike is in the horizon. Mervyn King made a public appearance on Wednesday and cooled down such expectations. He said inflation could go above 3% but the likelihood is that it will cool later in the year, and preferred to focus on the problems of the economy, especially on the big government deficit.
Wednesday and Thursday of next week promise to deliver a mixed bag by way of information. There will be minor economic statements coming through from the Eurozone, mostly focusing on French and German spending and consumer and business sentiment, but these are unlikely to prompt any decisive change between sterling to euro. The 26th will see the release of the first HPI figures of the year, relative to December’s homes sales activity. Consumer sentiment in the UK has taken a bit of a knock already this year and many property agents are reporting greater interest, but less stock available.
The significant economic data released next week is the preliminary GDP figures. There are 3 versions of GDP, released a month apart – Preliminary, Revised, and Final. The Preliminary release is the earliest and thus tends to have the most impact and given that these figures chart the change in the inflation-adjusted value of all goods and services produced by our economy they will allow us to asses not only the accuracy of the governments figures for last year, but also the threat of inflation rising above the current 2.9% level. A GDP figure higher than forecast is usually sterling positive, so we could see the 1.15 level tested, but we do need a drive to 1.155 for the markets to stabilize around this support level.
Hasta la proxima!
Please feel free to contact me at keith.s@currenciesdirect.com and I will reply to all your questions promptly.
Visit us in our Spanish offices in Costa del Sol, Costa Almeria, S. Costa Blanca and N. Costa Blanca
Telephone: UK 0845 130 8148 • SPAIN 902 310 444 • Email: costadelsol@currenciesdirect.com • www.currenciesdirect.com
A very good work for sterling last week as it pushed beyond the key 1.13 level against the euro and also gained against the USD. The push on sterling was largely attributed to improved economic data leaning to a more positive outlook for the UK economy. In addition the National Institute of Economic and Social Research (NIESR) estimated that UK fourth quarter GDP which is due out next week will come in at +0.3%- so therefore the UK will be out of recession! The upbeat assessment was mirrored by MPC member Andrew Sentence who commented that the Bank of England may need to raise interest rates this year. So will this good run continue this week?
Hopefully so. We have a plethora of economic data and feedback this week from the UK economy which could galvanize sterling further. We start on Tuesday with the Consumer and Retail price index which is a gauge on inflation for the UK- the expectation is that the measures will show an increase in inflationary pressure which will add further to the probability of a rate rise in 2010. Following this we have the Bank of England minutes which may offer an insight into the cessation of the Quantitative Easing programme- possibly as early as February. Following this we have retail sales and jobless data followed by public finance data. So a big week for the pound and if we get more positives than negatives we could see a stronger pound ahead of the official release of Q4 2009 GDP next week.
For the Eurozone we are again focused upon Greece. Greek officials are summoned to Brussels to face a grilling over “unreliable data” which hid the real story behind the health of the Greek economy. This again could lead to a weaker euro, last week German Chancellor Merkel stated that the Greek problem is adding great pressure to the Eurozone.
The key market level will be to hold above 1.13 and then push back to 1.15 to show a clear break from the current trading range of 1.10-1.13.
Please feel free to contact me at keith.s@currenciesdirect.com and I will reply to all your questions promptly.
Visit us in our Spanish offices in Costa del Sol, Costa Almeria, S. Costa Blanca and N. Costa Blanca
Telephone: UK 0845 130 8148 • SPAIN 902 310 444 • Email costadelsol@currenciesdirect.com • www.currenciesdirect.com
Despite the current economic climate in the UK and the ongoing weakness of sterling against the euro there are some signs of recovery on the popular holiday island of Lanzarote. As British visitor numbers rose for the first time during the whole of last year in November – according to the latest figures just released by the Spanish airport authority AENA. Whilst key player and leading budget airline Ryanair has just announced the extension of their services to the island well into 2012.
As recently as last Spring the tourist and property sectors of Lanzarote´s economy appeared close to meltdown. As foreign tourist numbers were falling by 15% a month and occupancy in Lanzarote hotels, villas and aparments declined to their lowest levels in over forty years.
The British market has long been the powerhouse of both the property and tourist sectors on Lanzarote. Accounting for well over 50% of the island’s annual 1.5 million foreign tourist arrivals. As well as the bulk of overseas investment in holiday rental properties.
However the combined impact of the depreciation of sterling against the euro and the evaporation of consumer confidence in the wake of the credit crunch lead to a massive reduction in British visitor numbers during the first half of this year. With arrivals from the UK falling by 20% in the spring.
Now however that negative trend appears to be turning around. As the latest figures just released by the Spanish airport authority AENA reveal that the number of tourist arrivals from the UK rose for the first time during the whole of 2009 in November. Up by nearly 7% to 63,753 arrivals. With visitor numbers from Eire also on the up – rising by 1.47% across the same period.
This remarkable about turn is being attributed to the impact of Ryanair´s entry into the market. As the budget airline tuned their attention to the island in October in order to take advantage of the suspension of airport taxes and charges by the Spanish government. As they sought to revive the country´s flagging tourist sector.
Ryanair started operating 17 new flight services to Lanzarote from across the UK in November. These proved so popular that the airline was rapidly established as the number one volume carrier to Lanzarote by the end of their first full month of operation. And as result have just announced that they planned to extend their services to the island well into 2012 as a result.