The Pound traded close to the highest level this month against the Dollar, touching a high of $1.6580 in London, as improvements in retail sales and mortgage approvals prompted speculation that the recession is abating and the Bank of England will increase interest rates. The UK currency also rose for a second day against the Euro and the Yen, as a report from the Office of National Statistics showed that sales increased last month at four time the pace expected.
Tentative signs of improvement in the UK economy and store discounts encouraged consumers to step up spending, as sales climbed 1.2% from May, when they plunged 0.9%. Prior to the report, economists had predicted a smaller 0.3% increase and subsequently rallied against the majority of the 16-most actively traded currencies.
William Morrison Supermarkets Plc said earlier this week that earnings will beat preliminary forecasts, while the UK housing market slump has shown signs of easing, and Bank of England Deputy Governor Charles Bean says that the economy may now have stopped contracting. Alan Clarke, an economist at BNP Paribas SA, said that “this is going to lead to near-zero GDP in the second quarter. We’re past the worst, but we’re not heading for a boom.
The rising unemployment rate still remains a major concern to consumers and that may keep a lid on spending in the medium-term. Bean also said this week that unemployment will probably keep increasing. The number of people out of work rose to 2.38 million in the quarter through May and the British Chamber of Commerce said this month that unemployment may reach 3.2 million by the middle of next year.
UK gross domestic product slumped 2.4% in the first quarter of the year, the most in 50-years, and reports this morning will probably show that the economy contracted 0.3% in the second quarter, indicating that the recession is abating. Bank of England policy makers voted unanimously to maintain their asset-insurance program, saying that there was no clear evidence to support an increase in the plan, as the risks to the economy had probably diminished.
There was also an increase in BBA mortgage approvals according to the latest data with approvals at a 15 month high and this helped maintain the mood of greater confidence towards the UK housing sector, which also underpinned risk appetite. Loan approvals for home purchases increased to 35,235, from 31,919 in May and that level has almost doubled in seven months.
The UK property slump is showing signs of easing and banks have become more willing to lend. David Dooks, statistics director at the British Bankers’ Association, said that the “number of new home loans approved by the high-street banks are recovering from the very low level last November, and so far this year gross mortgage lending has topped £50 billion.”
The Bank of England may raise UK interest rates as the first step towards exiting its quantitative-easing program. David Bloom, a currency strategist at HSBC Holdings Plc, said yesterday that “we find the idea that the UK will raise rates next year but the U.S will stand pat a very powerful one. This should be just the event to see the Pound gain.”
HSBC Holdings Plc raised its Pound-Dollar forecast for the end of 2010, citing the likelihood that the Bank of England will interrupt its asset-buying program next month and raise interest rates before the Federal Reserve. The Pound will climb to $1.75 by the end of next year, despite previous forecasts that the Pound’s “fair value” against the Dollar through 2010 was $1.60.
The UK currency has climbed 14% against the Dollar this year, after depreciating 26% in 2008, amid speculation that the worst of the recession is over. The Bank of England’s benchmark interest rate will rise to 1.25% by the end of 2010, from a record low of 0.5% currently. Bloom also stated that “the Pound’s longer-term fortunes are looking brighter, especially since the BoE’s quantitative-easing program is expected to take a clear breather soon.”
Bank of England policy makers Andrew Sentence also said yesterday that the Central Bank may pause its bond purchasing program and shift to a “watching” stance next month, providing officials determine that they have done enough to nurture an economic recovery. However, there is a high degree of uncertainty over the situation and the Pound may swing between gains and losses in the build-up to the August announcement.
The Pound is still being driven to a large extent by trends in risk appetite and firmer equity markets continued to offer significant support yesterday. UK stocks climbed for an unprecedented ninth day yesterday, the longest stretch of gains since 2004. The FTSE 100 Index gained 1.1% in London, while the Dow topped at 9,000 for the first time since January.
Data Released 24th July
EU 09:00 Flash PMI – Composite (July)
GER 09:00 Ifo Index (July)
U.K 09:30 Preliminary GDP (Q2)
U.S 14:55 Michigan Sentiment (July Final)
written by Adam Solomon
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