Sterling drops despite IMF backing; retail sales figures disappoint

Tom Tong07/Jun/2011Currency Updates

GBP

Sterling slipped against the dollar and euro yesterday as the UK economy showed signs of strain and risk appetite dipped. Yesterday, the British retail sales consortium monitor showed that total sales values dropped by 0.3% year-on-year in May. This data supports the feeling that consumer demand in the UK economy is being depressed by falling ‘real incomes’ due to high inflation and low growth. Fears over future income prospects also muted consumer demand during May. This bearish news was echoed by a fall in new car sales, with new car registrations falling for the 11th month in May.

Despite the IMF being generally supportive of George Osborne’s economic plan, suggesting that no ‘plan B’ was needed yet, sterling was pressured by their conclusion that more quantitative easing may be needed if the recovery continues to be weak. The overall tone of the IMF report was one of support for the UK recovery but the IMF still revised down its expectations for the UK economy with it expecting it to grow 1.5% rather than the 1.7% originally predicted.

USD

The dollar index rose yesterday but was still near a one month low. The Greenback made some small ground against sterling yesterday as the UK was dealt a tempered blow by the IMF. However, the dollar remains precariously position after a spate of weak data last week and especially disappointing non-farm payroll figures. With the Fed continuing to signal its intention to keep rates lower for longer than its European counterparts, with the possibility of QE3 at the end of the month now being talked about,  the dollar is being used as a funding currency and should remained pressured in the short to medium term at least.

EUR

The euro lost ground against the dollar yesterday but remained buoyant against the pound as doubts over the technicalities of graces restructuring package where raised. The single currency was dealt a blow by the Chairman of the euro group, Jean Claude Juncker, stating that the euro was overvalued. The impact of this news was personified by a senior German policy maker suggesting that a second Greek aid package is not certain with the ratification of any package dependant on the outcome if an IMF and ECB report being published in the coming weeks. The longer term outlook for the euro largely hinges on Thursdays ECB meeting. After rallying for two weeks, despite the on-going situation in Greece, any further movement in the single currency hangs on clear indications from the ECB on whether they plan further rate hikes over the coming months with the market expecting Trichet to confirm an interest rate hike in July.

Elsewhere, investor confidence in the single currency block has dipped according to figures shown by the Sentix index yesterday. The fears over Greeks sovereign debt and continued inflationary pressures have been sighted as reasons for the near-collapse in investor confidence. Spanish industrial output also dropped yesterday. Despite the market currently focusing on the Greek sovereign debt situation it is worth noting any deterioration in Spanish conditions could see them become the next nation to be embroiled in the sovereign debt crisis.

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Written by Tom Tong

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