Money Transfers: Pound Sterling Under Pressure

The pound remains under considerable pressure against the 16 most actively traded currencies in the market as an endless stream of poor UK economic data continues to be published ahead of the Bank of England’s next Monetary Policy Committee meeting due this Thursday and the review of the UK’s AAA credit rating by Moodys.

This morning, figures from the British Retail Consortium’s (BRC) can best sum up the Christmas retail period as “underwhelming”. Analysts at Barclays Research summarized the data “With consumer confidence remaining depressed and spending power growth likely to be measured, we do not expect the retail environment to improve significantly this year.”

Prime Minister David Cameron tried his best in an interview to play down the significance of any loss of the UK’s prized AAA status suggesting that the judgement of the markets is more important than the UK keeping its AAA rating but the majority of analysts are now of the view that the UK will follow the US and France in being stripped of the top credit rating.

All three credit ratings agencies have the UK on either ‘negative watch’ or ‘negative outlook’. Moody’s are due to carry out a review this month and Fitch later on this year.

Last week saw the publication of even worse than expected data from the UK construction and services sector with the only bright spot being a pick up in the manufacturing sector. The services sector data was of particular concern as it was the worse monthly figure for 2 years and the sector represents 70% of the UK economy.

Some analysts suggest that the brighter outlook for the manufacturing sector suggest the Quantitative Easing (QE) program perused over the last few years by the Bank of England which has now topped a budget of £375 billion is, albeit slowly rebalancing the economy and therefore suggest that the QE program is far from finished. One of the side effects of the QE program is it devalues the currency.

Elsewhere, the better than expected US employment data out last Friday was taken by analysts to suggest that the Fed’s own QE program maybe wound up later this year.

The pressure on both the pound and dollar helped the euro make significant gains against both ahead of Thursday’s European Central Bank (ECB) meeting. Most analysts believe the ECB will keep interest rates unchanged but may embark on another type of monetary stimulus. With Spanish and Italian bond auctions also due at the end of the week, the euro is likely to remain in a strong position, at least for the time being.