The UK government struggle to meet deficit targets, as the US housing market continues upward trend.
22/Feb/2013 • Currency Updates•
Sterling plunged to a three-year low against the dollar, the catalyst for the slide coming from the BoE suggesting growing support for further QE. Such support was unexpected; policy makers were comfortable with inflation exceeding target rates of above 2% which we are likely to see for the next 2 years. The sterling depreciation has been labelled the ‘Carney Short’ with some analysts forecasting that the UK’s economic outlook is nearly as bad as the Eurozone’s – hard to argue against for the short term.
Hedge funds remained the main buyers of the pound, taking profit on its recent steep drop. BoE minutes contrasted with the US Feds as policy makers thought bond-buying should be stopped or slowed, a view which helped to push sterling even lower. This also impacted UK stocks, declining the furthest in almost seven months.
Ofcom raised £2.3bn from its 4G auction, a shortfall of £1bn which was factored in to George Osborne’s Budgets for 2013. Such implications will directly impact the deficit; we could see borrowing this year higher than it was in 2011-12.
Potential volatility in the market today will be focused around the GDP release from Germany at -0.6% down from .2% previously, Eurozone core CPI at 10am and German Business Climate Index at 9am. The focus today will be on the ECB, which will announce the amount of LTRO payments banks intend to make next week and to expect caution ahead of the Italian general elections kicking off this weekend.
The ECB made €555m in interest income front its bonds program in Athens and made another €553m in interest on other securities which will be divided up among the central banks. Contrasting PMI figures released from France and Germany, the Eurozone’s two largest economies; France private sector output plummeted to a 47 month low and Germany posted a PMI of 52.7, some 10 points higher than France. France is set to halt all spending on defence, higher education and research in a last minute bid to meet European deficit targets for 2013 as the country slides into a deepening hole. France had been counting on .8% growth however Brussels slashed its forecast to just .1%, continuing on a downward spiral towards a triple dip recession.
The European market continues to show signs of recovery however this data release highlights persistent problems in the Eurozone.
Sales of previously owned US homes increased in January, showing signs of momentum coming off its best year since 2007. The greenback continued its march north as CPI was unchanged for a second month despite an unexpected contraction in Philadelphia manufacturing and an increase in jobless claims.
US stocks fell for a consecutive day after reports casted doubt over the health of the economy. The dollar index which measures its value against a basket of six major currencies dipped .2% having gained .8% so far this week. There appears to be an increasing internal debate about the Fed scaling back its bond buying programme which boosted the dollar at the expense of many other assets.