Cable Drifts Lower Against The Greenback

Cable Drifts Lower Against The Greenback

Good morning and welcome to today’s foreign exchange market commentary on Wednesday, the 8th of August.

The jobless dilemma:

The latest US job non-farm payroll report for July showed the economy added 163,000 jobs, far greater than the 64,000 predicted by economists. Conditions today are far better than they have been in the past, say during the Great Depression of 1933. If one considers global income distributions, total world wealth, growth prospects of frontier and emerging economies and the level of overall technology, things would look pretty good even though on parameters like domestic income inequality, they may look bad.

Though we are no where close to the Great depression, a pattern of the long-term unemployed had emerged during the period. An economy that experienced high levels of unemployment recently, measures like moderating govt. budgets and devaluing exchange rates may prove ineffective.  Economists are unable to explain persistent unemployment in different countries even today despite nations having different labour market structures.

The business cycle problems being witnessed globally have been somewhat effectively countered through aggressive and expansionary fiscal and monetary policies over the last four years. However, barring a few unexpected counter-trends, this will become less true in the next couple of years since the labour problems are not demand-side failures that can be easily solved by expansionary monetary policies. Rather, it’s a structural problem with participation failure that lacks a simple solution.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2589
GBP/US$ – 1.5586
GBP/CHF – 1.5130
GBP/CAN$ – 1.5555
GBP/AUS$ – 1.4784
GBP/ZAR – 12.7475
GBP/JPY – 122.17
GBP/HKD – 12.0878
GBP/NZD – 1.9176
GBP/SEK –  10.4939

EUR: The single currency remained range-bound yesterday due to lack of tier-1 economic news from Europe. Greece’s downgrading by ratings agency S&P didn’t come as a surprise to investors either. Uncertainties over the ECB’s intervention in bringing down Spanish and Italian bonds still remain and the usual rhetoric by EU leaders are unable to excite markets any longer. Leveraging the European Stability Mechanism to buy bonds from the secondary markets will be decided by the German Constitutional Court on Sep. 21 and markets are expected to remain undecided till then. EUR/USD is trading closer to its recent low of 1.2370 while the GBP/EUR pair has changed little over yesterday’s close of 1.2600.

USD:  The cable has drifted lower against the greenback today morning after hitting a high of 1.5680 yesterday morning. Yesterday’s UK economic data though negative, actually contracted less than projected, indicating slight improvement over the prior period. Manufacturing production was lower at -2.9 percent month-on-month against an estimated -4 percent while industrial production slipped 2.5 percent over previous month against an estimated 3.3 percent. The Bank of England’s inflation report is due today and many economists expect Mervyn King to remain dovish. Growth forecasts are expected to be cut and low inflation projection may trigger assets purchase by the central bank. The GBP/USD pair opens at 1.5585 this morning.

 

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