Currency update, September 17 - sterling falls to seven week low

Published: 17 September, 2010

Sterling fell to a seven week low against the euro yesterday as retail sales unexpectedly fell for August and high demand for Spanish debt strengthened the single currency.

Currency Rates
EURO/GBP - 1.194
US$/GBP - 1.570
CHF/GBP - 1.597
CAN$/GBP - 1.606
AUS$/GBP - 1.659
ZAR/GBP - 11.192
JPY/GBP - 134.83
HKD/GBP - 12.192
NZD/GBP - 2.143
US$/EURO - 1.314
HUF/GBP - 340.02

Sterling slipped to €1.1904/£1 as retail sales fell by 0.5% against an expected gain of 0.3%. Many analysts took the data as a sign that consumers are reigning in spending ahead of spending cuts/ tax hikes expected later in the year. Sterling stayed relatively flat against the US dollar after a strong performance earlier in the week. A survey showed that British factory orders dropped a little more than expected against last month and export figures fell slightly. The UK needs to rebalance from an economy driven by debt to an economy driven by exports and with a weak currency this should happen automatically. Poor export figures are therefore a concern.

In the Euro zone, the single currency had a strong day yesterday. Data showed that the trade deficit fell by more than expected. Analysts expected the deficit to shrink to €-0.7bn but in fact it came in at just €-0.2bn. In addition, the Spanish government auctioned a number of bonds today and demand was far higher than expected. With the current concerns over European debt that are prevalent, the high demand surprised analysts and investors and drove sentiment higher for the euro. This resulted in it hitting a 7 week high against the pound. It is again a relatively light day on the economic calendar today, with German inflation data the only real data released.

The USA had a poor day after data showed the US recovery was weakening. Risk aversion crept back in and saw high demand for US government bonds as investors looked for safer assets to hold. Data showed that business conditions contracted in the US in August and weekly claims for unemployment benefits remained high. This pushed the euro to the highest level in a month against the US dollar reaching a rate of $1.3112/€1.

Elsewhere, after heavy yen selling by the Japanese government on Thursday the markets settled down somewhat. However, investors were hesitant to go near the currency in case further intervention adversely impacted them. Prime Minister Naoto Kan pointed to more intervention over the coming weeks, so watch this space.
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