Moving to Fuerteventura

GBP/EUR reached back to 1.18 for the first time since the end of June. Recent data again demonstrated the contrast between the UK and the EU with the former’s service sector survey rising for the 3rd month in a row above 50 and the EU’s falling short at 45.7. The UK also recorded monthly gains in industrial production, while EU retail sales remained stubbornly negative.

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

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