For Pound the Barrage of Bad Data Continues - Will BoE Consider Cutting?

Another day brings more bad new for the UK economy.

Talking Points

•    Japanese Yen: back to 107.50 as equity prices rebound
•    Euro: Trade Balance contracts as exports decline
•    British Pound: Confidence at four year lows, Trade stable
•    US Dollar: MBA Applications on tap

For Pound the Barrage of Bad Data Continues – Will BoE Consider Cutting?

Another day brings more bad new for the UK economy. Nationwide consumer confidence sunk to a four year low of 63 versus expectations of 65 while Visible Trade Balance remained essentially unchanged at –7.5 Billion GBP.  Although cable declined appreciably against the euro, UK exporters saw little benefit from the move as they were forced to purchase many input components at higher prices. As a result export prices actually rose more that import prices (2.1% vs. 1.9%) offsetting almost all of the advantages the lower currency thus providing  virtually no help to the countries chronic Trade deficit.

Yesterday, the British Chambers of Commerce quarterly report found that “credit crunch and rising costs had dented the most important sectors of the economy” increasing risk of a UK recession. Certainly the data over the past two weeks has shown a dramatic deceleration of activity in the UK economy with construction, services and manufacturing sectors all plunging below the 50 boom/bust line. Despite that fact many analysts expect the UK central bank to remain stationary for the time being as skyrocketing energy prices  continue to push inflation higher.

Writing in the Independent yesterday, Jeremy Warner noted that,” Doing nothing therefore becomes the safest option, as well as perhaps the only viable one. To cut interest rates while inflationary pressures remain acute only risks repeating the policy mistakes that helped do for Britain in the 1970s. Economies such as Germany that kept inflation under control even as oil prices rocketed ultimately emerged from that troubled decade in much better shape. Painful though the present environment is to many people and businesses, cutting rates isn't yet the right policy response.”

Nevertheless, we wonder for just how long will the MPC be able to maintain a stiff upper lip given the bleak economic landscape. UK builders for example are facing the worst market conditions since the 1930’s. Meanwhile if global equities continue their downward slide economic news for UK will only get worse. We’ve often referred to UK as the hedge fund economy because of the country’s outsized dependence on the financial sector for its economic growth. Therefore, a drop into the 10K level for the DJIA is likely to result in more economic pain for UK and may force the BOE off the fence despite concerns about second round effects.  For the time being cable  has been able to maintain a semblance of stability on the assumption that rates will not change tomorrow.

Trade data was decidedly disappointing in the EZ as well as German exports fell precipitously shrinking the surplus from 17.3 Billion to 14.4 Billion.  The news confirms the notion that higher exchange rates and higher energy costs are finally exacting a toll on EZ producers and suggests that ECB will remain neutral for the rest of the year irrespective of any inflationary pressures that percolate through the system.

With no additional data for the rest of the day, the trade in EUUUSD is likely to be driven once again by the larger macro factors of oil and equities. Yesterday the dollar saw a boost form sharply falling crude and should prices head towards the $130/bbl level the greenback is likely to strengthen further.

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