Foreign Currency

Foreign Currency
The £ is broadly unchanged against the euro and the dollar, despite an unexpected fall in US retail sales. The underlying figure (ex autos) fell by 0.6% in July, following an upwardly revised 0.5% increase in June. The total reduction in July retail sales (including autos) was 0.1%. The data indicates that the US has yet not entered recovery territory, although the US economic downturn is probably close to a trough. The US Federal Reserve Board statement on Wednesday made reference to US economic activity leveling out. This is significant from a UK perspective since the US is the UK’s largest export market by nation and that any recovery in the USA would be translated into a higher rate of growth in Asia and western Europe. Today there are no key UK economic releases. Next week sees publication of a large volume of UK data, including retail price statistics.
Interest Rates
Period rates are fractionally lower in response to US sales data. There is likely to be a degree of volatility in period rates next week, given the significant volume of UK releases. The most recent survey data is consistent with UK economic growth reaching a trough in the current quarter followed by a moderate upturn in quarter 4. Thereafter we expect the UK to experience a very gradual recovery in 2010 followed by a more rapid rate of growth in 2011, as bank credit becomes far more readily available. Our prediction is not dissimilar to the underlying Bank of England Quarterly Inflation Report forecast, but we expect the path of economic recovery to be far more uneven as opposed to the Bank’s of England’s central projection of a V shaped recovery. We concur with the Bank of England view that risk to forecast is high, given the complex international forces that will drive the G7 economies over the next 2 years. Very short rates continue their downward trend. Yesterday, 3 month sterling LIBOR fixed at 0.78375%.
Equities