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U.S Economy Grinding to a Halt

Sterling rose against the dollar yesterday as a bounce in global stock markets prompted investors to drop positions in safe havens like the yen and U.S. dollar. UK retail sales survey helped sterling to bounce higher but the mood still remains cautious.

The Confederation of British Industry’s survey showed UK retail sales growth at a three-year high, posting at +35 in August from +33 in July, well above forecasts for +20.

“We saw some good quality flows into sterling, but I would not be reading too much into its gains today as it was more of a dollar pullback story,” said Kenneth Broux, strategist at Lloyds TSB Financial Markets.

Risk aversion trends are becoming less Dollar-centric as other sovereign currencies are considered. The American Dollar has lost some of its appeal after a new round of quantitative easing rears its head.

This afternoon the markets will be looking forward to a speech by Federal Reserve Chairman Ben Bernanke, “the data out from the U.S. was a bit better on Thursday, providing some relief and putting risk back to the markets. But I think it will be pretty ranged ahead of Bernanke.”

Bernanke is scheduled to speak in Jackson Hole this afternoon, and is likely to signal his views about the U.S. economy. U.S. data on Thursday showed claims for unemployment benefits fell more than expected, pushing Wall Street stocks higher.

Sterling also edged up against the euro yesterday making ground towards the 5 month high at 1.2400 GBP/EUR. Markets will be anticipating the UK GDP figure this morning to see whether the steady rise can be maintained.

Broux at Lloyds said he was bullish about the sterling/euro, given the euro zone’s struggle with sovereign debt issues and concerns about a possible slowdown. Data yesterday showed that while the German economy rebounded further, Spain and Italy faced a much harder path to recovery coupled with an Irish debt downgrade could add to further exchange rate volatility.

The pound is still reeling after MPC policy Member Whelan’s comments a few days ago where he stated “Britain faces the risk of sliding into recession and the central bank’s growth forecast for this year and next may be too optimistic,” markets don’t forget this kind of comment quickly.

Weale said dangers ahead include a renewed hike in unemployment as well as declining house prices and another banking crisis. “That could be a sovereign debt crisis or it could be a new liquidity crisis in the private sector,”

The Australian Dollar is still range bound as the transfer of power hasn’t quite taken place yet. Corporate activity in Australia has helped to buoy the Dollar, the Rio Tinto profits being just one of a slew of good earnings.