This could lead to Sterling weakness in the near future as retail sales figures are heavily reliant on weather alongside businesses losing £millions due to staff not turning up and operations not running as normal so be aware upcoming data for the U.K from January (usually released in February) may now be poorer.
Tuesday’s trading continued a poor start to the new year for the struggling pound. Sterling dropped against all major currencies for the second day running after peaking between Christmas and new year. Sterling fell on the back of weak economic data, coupled with some market jitters as the election campaign gets under way, and the spotlight comes back on the UK’s level of debt.
Morning data for the UK showed that British Construction activity contracted for the 22nd consecutive month, supporting concerns that the UK recovery is lagging behind that of other major world economies, in particular the US and Euro-zone. Construction PMI figures rose to 47.1 from 47 last month, but were somewhat short of analyst’s predictions of an increase to 47.8 causing the pound to drop in the morning session.
Election Campaign Begins…
As the various parties begin campaigning for a ruling position in the UK, concern is building in the currency markets about how the UK will tackle its ballooning deficit over the coming years. I personally feel that this year’s election could cause more volatility in the currency markets than previous years due to the importance of cutting the UK’s debt level, particularly from a Sterling point of view as this has been the main factor weighing on its value over previous months.
The biggest fear for investors is the potential risk of a hung parliament, the outcome where no single party commands an overall majority. Analysts believe that an outcome of this sort would make it incredibly difficult for the government to carry through the necessary measures to successfully reduce the level of debt.
"Sterling did sell off after the construction data, but it's largely the political backdrop that is the focus at the moment," said Christian Lawrence, FX strategist at RBC Capital Markets
The general election has to be held by June and I expect a rocky ride for the pound during this time.
Retail Recovery?
After UK Retail Sales dropped in November, John Lewis have given hope to an improvement in the month of December after reporting record sales for the Christmas season. Revenue in stores breached £500m in the 5 weeks leading to January, a 12.7% increase on figures from last year. Clearance sales were pinpointed as the main driver for this performance as companies looked to end 2009 on a high. Sister company Waitrose also reported a notable increase on last year. Retail sales can be fragile however and one major factor likely to influence figures in December and indeed January is the deepening winter conditions which will directly affect individuals and businesses alike as the snowy conditions restrict transport options. You will be pleased to hear however that whatever the weather, FCD will be here on hand all opening hours to be of assistance!
The Rest of the week….
After a quiet start to the week on the data front, the rest of the week holds a few more key releases to watch out for. The main event for the UK is the interest decision on Thursday from the BoE. Expectation is for both the rates and QE policy to be held, however rumours of an extension to the programme have been increasing and a surprise announcement could be damaging to Sterling exchange rates. Anyone with a USD interest should keep an eye on the FOMC (Federal Open Market Committee) minutes tonight at 7pm and Non-farm payroll and unemployment rate on Friday afternoon. If future interest rate hikes are talked up in the minutes we could see the USD continue its run on the pound even further. For those with a Euro interest Retail Sales figures on Thursday and GDP and Unemployment figures on Friday could be key for the Euro. As ever these data releases are likely to offer some opportunities to both buy or sell foreign currency if timed right.
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