Sterling struggles as industry orders fall

Published: 21 January, 2011

Sterling struggled yesterday as a survey by the Confederation of British Industry unexpectedly showed orders fell in January.

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Wednesday's unemployment figures showed that 2.5m people are out of work (the highest since last spring) and the number of 16-24 yr olds out of work is at a record high of 951,000.

The CBI data and less than rosy employment figures contrast with Tuesday's higher than expected inflation figures and adds to the dilemma that the Bank of England faces regarding monetary policy. Inflation is stubbornly high and any interest rate hikes to curb this could stifle the economic recovery. Sterling will be held back if unemployment and other fundamental figures continue to disappoint. Either way, I don't think we will see any change from the BoE on interest rates or monetary policy until Q3 at the earliest. Out today, we have key retail sales data and mortgage approval figures - both of which could further dent the fundamental outlook for the UK.

In the euro zone, the euro strengthened by 0.5% against sterling after large 'real money' (i.e. non speculative) buying saw a significant market movement. Spain also came close to finalising plans for a second round of recapitalisation for the country's troubled banks. This helped yields on Spanish bonds fall, essentially giving the country access to better borrowing rates.

In the USA, the US dollar had a good day, gaining broadly as a wide array of data showed that the US recovery is firmly under way. Existing home sales showed nearly 500,000 more than expected and unemployment claims dropped by 40,000 on last month. The biggest concerns for the US recovery are house sales and employment, so these figures were a welcome change to previous months.

Elsewhere, the commodity backed currencies (Australian, Canadian and NZ dollar, South African rand) suffered yesterday as China's 9.8% quarterly GDP sparked rumours that the country would look to calm the economy down. This would impact demand for commodities and as such saw the currencies drop.

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