This week

The pound briefly held onto the gains it made on Friday after the release of the US Non-Farm Payrolls figures but quickly slipped back into the previous weeks downward trend as a lack of major economic data this week placed sterling at the mercy of wider market movements. Merger and Acquisition (M&A) talk remained an influencing factor as details of funding for the Prudential/AIG Asia kept traders aware that a large sterling sell off was pending in the near future. Added to this an announcement by British Petroleum (BP) of a $7bln deal to purchase international oil and gas assets in Brazil from US based Devon Energy weakened the pound further.

The data that was released had by and large a negative impact on sterling trade. RICS house price figures showed prices falling to 17%  from 32% while a BRC retail sales figures was largely ignored due to the impact of the VAT increase in January still needing to be fully filtered out of the data. UK Trade balance figures continued to fuel sovereign debt concerns and the trade deficit increased to £3.77bln and the previous deficit numbers were revised higher to £2.599bln, neither figure suggesting an easing in the UK’s debt position anytime soon. The final data release for this week was UK industrial production which m/m for January came out at -0.4%, analysts had expected production to drop to 0.3% from 0.5% in December 2009 so the headline figures were certainly disappointing and causing the pound to fall to an 11 month low versus the Dollar and a 3 month low against the Euro. M&A and data releases weren’t the only factors placing pressure on the pound, dovish comments and weak economic assessments from government contributed to the pounds weaker levels. Bank of England member Kate Barker commented that she felt she had seriously underestimated the financial crisis and monetary policies ability to combat that crisis, her comments fuelled the general market sentiment that the BoE had been slow to act. Prime Minister Gordon Brown said on Wednesday that economic ‘recovery remained fragile and that to change course now would risk plunging Britain back into recession.’ Ahead of the elections in May his statement was seen as simply political posturing.

Closing out the week sterling regained its composure to reclaim all of its earlier losses after a news report that the Bank of England’s ‘approval rating’ was at its highest since March 2007 and that expectation for higher interest rates in the UK by the end of the year had increased. Chancellor Darling further support the pound rally as he position the government ahead of this month’s budget report. Darling warned that he would not be delivering ;Christmas-tree-of-a-Budget’ and that he remained committed to the target of halving Britain’s budget deficit in four years. His comments make economic sense as the UK recovery remains fragile.

The dollar continues to receive support from safe haven buying as sovereign debt concerns remain a significant issue amongst market participants. US economic data was not a major influencing factor behind the greenbacks strength as equity markets, commodities and weaker economic data in the UK and Europe dictated the dollar’s direction of trade. US weekly oil inventories increased more than forecast  coming in at 6.5M pushing oil prices sharply lower and given the dollar inverse relationship with oil strengthened the currency as future demand would be expected to fall. Oil prices did suffer some volatility throughout the week as profit-taking and technical retracements in oil pushed prices around. US Trade balance and retail sales figures provided fundamental support for the dollar as the trade deficit in the United States shrank to $37.2bln, down from the previous $40.2bln figure. Retail sales came out at 0.8% versus 0.5% in January. in Euro trade and in some respect for sterling as well technical trade weighed on the dollar, EUR/USD broke the 1.37 resistance level after market began to calm down over the Greece situation which spark a broad-based slide for the US currency.

As with the pound the Euro saw a significant volatility as the Euro zone continues to try and resolve the Greek debt crisis. French President Sarkozy, after meeting with the Greek Prime Minister, came out in support of Greece’s debt reduction strategy. Meeting later in the week with US President Obama the euro continued to receive support as the US praised Greece’s resolve to tackle its debt problems, although the Obama did not openly support Greece. Regardless the of the details the events were enough to calm market fears and allow for a stronger euro. ECB President Trichet provided further confidence to the market as he gave the central banks support to a proposed European Monetary Fund as a measure to support member states during the global recovery. Debt issues and financial regulation aside, economic data provided another source of strength for the single currency. German industrial production increased to 0.6% from -1.0% in December while CPI inflation increase to 0.4% In February. Following on from the German figures EU industrial production also beat expectation . The only negative data was a reduction in Germany’s trade surplus.

Next Week

As the Pound and Euro recovered to the end of last week focus this week will remain on global recovery and support from economic fundamentals. Sterling is likely to continue to struggle as analysts continue to see a slow and prolonged recovery process for Britain’s economy, a slowdown in the housing sector and a recent string of weaker data releases supporting this view. Rightmove house prices and mortgage approvals data will therefore be of great interest but the main focus will be on UK net borrowing figures as we have once again seen speculation over the sustainability of the UKs AAA credit rating. The Bank of England’s minutes from the last MOPC meeting will also be awaited to see if inflation and growth expectations have changed in any way.

Economic Data Releases