With Sterling, the FTSE and hopes, running high, even in the press, it was left to the Bank of England to burst the bubble by quite unexpectedly announcing a £50 billion extension of the quantitative easing programme. Commenting that the recession had proved deeper than expected and that the recovery still looked fragile, the Bank decided that additional buying of Government gilts, designed ultimately to stimulate fresh lending to the economy, was necessary. Sterling fell rapidly on this announcement, down to 1.1630, only to stage a recovery back up to 1.1750.

The UK’s BRC (British Retail Consortium) retail sales survey said like for like sales were up 1.8% in July after a 1.4% increase in June and only 8% of the surveyors in the RICS report were seeing prices declining in July, compared to 18% in June and close to 100% last year. EU industrial production reversed June’s positive number to report a 0.6% decline, leaving the annual decline at 17%.

Just ahead of the Bank’s report the UK unemployment was released showing a 13 year high rate of 7.8%, with 2.4 million without jobs, setting the scene for the big downgrades expected from Mervyn and his team. But the downgrade of this year’s GDP forecast from -3.9% to -4.4% was tempered by a solid upgrade for 2010, from +1.1% to +1.8%.

Further reading of King’s comments showed that the additional QE had been motivated by the need to address the danger of deflation over the next 2 years. Achieving a 2% inflation target is, after all, the Bank’s primary remit and their own model currently shows the danger of undershoot. Sterling remained stable at just above 1.16 in the wake of this report.

The real excitement came however when France and Germany reported they had escaped from the clutches of recession with similar 0.3% GDP gains in Q2. This bolstered the EU wide GDP (Gross Domestic Product) figure to -0.1%, just shy of the magic number. This was a major surprise to every economist and possibly even to the countries themselves.

With the additional quantitative easing shock wearing off, Sterling started to recover again, particularly after the UK’s CPI inflation rate failed to fall as expected, asking questions of Mervyn King’s worries over the deflation threat.

The markets then received another Bank of England tremor when they revealed that further to the additional easing shock, 3 members of the MPC, including the Governor, had voted for £75 billion! The accompanying comments reflected the view that ‘the risk of doing too little was far greater than doing too much’. Sterling fell back towards 1.16 on this news.

The Euro meanwhile basked in an improved industrial orders figure at +3.1% on the month and another healthy spurt in the various components of the German IFO survey.

GBP/EUR slid close to 1.13 by Thursday.

Current Central Bank Rates:
Europe: 1.00% – European Central Bank (next meeting 3rd September)
UK: 0.50% – Bank of England (next meeting 10th September)
GBP/EUR Highs & Lows of August:
High: 1.1826
Low: 1.1312
A movement of: 4.54%

Difference this would make on a £200k property
High: €236,520
Low: €226,240
A difference of: €10,280

The details expressed in this transmission and accompanying documents are for information purposes only and are not intended as a solicitation for funds or a recommendation to trade. HiFX plc accepts no liability whatsoever for any loss or damages suffered through any act or omission taken as a result of reading or interpreting any of the above information. HiFX is a limited company registered in Spain. Registered
number: B92699743. Registered office: C/Azaleas 51, Bajo Dcha, 29660 Nueva Andalucia, Marbella, Malaga, Spain

The Eurozone however hardly remains unscathed from the credit crisis with the unemployment rate surging to 9.5% and the credit rating of Ireland being downgraded from sovereign AAA to AA1 accompanied by a negative downgrade.

Further green shoots emerged in the housing market as the RICS housing survey unveiled a jump in its reading from -43.8 to -18.1 in June, which is the highest level since September 2007. However the unemployment data reminded the market of the effects of the recession with another 281k jobs lost in the last quarter, taking the unemployment arte up to 7.6%, its
highest reading since January 1997.

Equity markets remained rampant as risk appetite continued for the second week, with 75% of the US companies who have reported thus far unveiling results that have exceeded market expectations. The FTSE has now climbed for 10 consecutive days, a feat only twice accomplished within its 25 year history. This ‘Armageddon bounce’ that took us out of the deepest darkest days in February/March is reflecting positively on Sterling as it continues to
hold on to its gains for this year.

Green shoots from the housing market and the High Street quickly withered in the shade of the Q2 GDP data, that recorded a far steeper drop in growth (-0.8%) than was expected and took the year on year drop to 5.7%.
One of the many new mortgage approval releases had set the scene with a healthy 9% rise on the month but it was the Nationwide’s house price survey’s 4th rise in 5 months that really caught the eye, firmly consigning the ‘perhaps it’s a blip’ thought to the bin. The annual decline has now improved to just -6.2%, leaving most/all of the forecasts for 20-50% declines over the coming months in the same receptacle. Of course the stats can be misleading and the low levels of activity in the housing market have been cited as one
potential caveat, as has the chronic lack of supply, but like the FX markets, at the end of the day its all about sentiment. Such is the importance of the housing market to the psyche of the consumer that this turnaround in fortunes could be extrapolated to unrealistic expectations for the economy, just as the demise of the housing market fostered so many gloomy forecasts just a few months ago. To take the middle ground, let’s just say that a housing recovery should at least ease consumer’s fears. The release of the monthly lending figures were another opportunity to justify your economic viewpoint. Lending to companies and consumers fell again, prompting concerns about the supply of credit and calls for the Bank of England’s quantitative easing to be extended. What the stats don’t tell you is how
many companies/consumers are happy to be paying down debt and this may have a positive impact on the spending patterns eventually, albeit at a slower pace than the credit fuelled days of yesteryear.

In the EU, the IMF joined the currency debate by stating that economic fundamentals suggest the Euro is up to 15% over valued. The Euro fell initially on this report but towards the end of last week an EU economic sentiment index had touched an 8 month high and EU unemployment failed to soar to 9.7% as expected, settling for a smaller rise from 9.3% to 9.4%.

Current Central Bank Rates:
Europe (E.C.B): 1.00% (Next Meeting 11th August)
UK (Bank of England): 0.50% (Next Meeting 6th August)
Highs & Lows of July:
High: 1.1760
Low: 1.1495
Movement of 2.31%

Difference this would make on a £200k property
High: €235,200
Low: €229,900
A difference of €5,300

The details expressed in this transmission and accompanying documents are for information purposes only and are not intended as a solicitation for funds or a recommendation to trade. HiFX plc accepts no liability whatsoever for any loss or damages suffered through any act or omission taken as a result of reading or interpreting any of the above information. HiFX is a limited company registered in Spain. Registered
number: B92699743. Registered office: C/Azaleas 51, Bajo Dcha, 29660 Nueva Andalucia, Marbella, Malaga, Spain