The pound enjoys a good start to the month

The pound enjoyed a good start to the trading month with solid gains registered against the majority of the 16 most actively traded currencies in a turbulent day in the financial markets as the crisis in the Ukraine intensifies.

Property website Hometrack reported that UK house prices increased by 0.3% month-on-month in January with the underlying market conditions described as strong by Director of Research Richard O’Donell who also added that the market started 2014 in a better position than a year ago.

Meanwhile the Bank of England (BoE) reported that the UK’s money supply (M4) expanded by 0.3% in January with lending to individuals rising by £2.1 billion or 0.1% month-on-month (1.4% year-on-year). The number of mortgages approved for home purchase rose from 72,798 to 76,947 and consumer credit rose by £0.7 billion or 0.4% on the month to £160.8 billion.

Meanwhile Markit reported that the UK manufacturing sector Purchasing Managers’ Index (PMI) rose from 56.6 in January to a reading of 56.9 in February, signalling improved operating conditions for the 11th month in a row.

All sectors, consumer, intermediate and investment goods reported a robust increase in activity with new export business saw solid gains in February.

The world’s stock markets endured a turbulent day yesterday with massive falls reported across the globe amid the rising tension and threat of all out war in the Ukraine. Not surprisingly, the Russian stock market reported the sharpest daily fall, over 10% and the Russian Finance Ministry also increased interest rates by a full 1.5% to 7.5% and the Russian rouble fell to an all-time low against the US dollar.

The US dollar gained from a rise in risk aversion as investors sought safety amidst the sharp stock market falls and was also aided by better than expected data out of the US economy.

The Markit Purchasing Managers' Index for the US manufacturing sector rose from 53.7 in January to a reading of 57.1 in February, well ahead of market estimates.

In the euro zone, European Central Bank President Mario Draghi stated that “Rates of consumer price inflation “way below” the ECB target of 2% are a threat to the euro zone and could dis-anchor inflation expectations and “we do not want that” in a speech yesterday ahead of the ECB’s latest policy decision on Thursday.

Overnight, the Reserve Bank of Australia (RBA) decided to keep interest rates unchanged at 2.5% pointing to rising unemployment and expectations for inflation to remain firmly anchored as the reasons behind the no-change policy decision.

RBA Governor Glenn Stevens pointed out that recent data suggested “firmer consumer demand and foreshadows a solid expansion in housing construction”. Stevens also noted the decline in the exchange rate, even though he stated that it “remains high by historical standards”.

However, Stevens kept all policy options firmly on the table by showing concern over the rise in unemployment in Australia stating that “The demand for labour has remained weak and, as a result, the rate of unemployment has continued to edge higher”.