Moneycorp Update

Sterling added a cent and a half, from $1.9550 to $1.97, on Monday before giving it all back with Tuesday's drop to $1.95. A rally on Wednesday was extended on Thursday to the week's high just short of $1.98. End of week profit-taking took Sterling lower on Friday and it opened in London this morning at $1.97.

A week of good-news-bad-news took Sterling on a roller coaster ride that covered more than ten cents. After the previous week's high producer price data investors were ready for a strong showing by the Consumer Price Index. They were not disappointed when the CPI inflation came in above its target band at 3.3 per cent, demanding the customary open letter from the Governor of the Bank of England to the Chancellor. The market was enthusiastic until it saw the content of that letter. In essence the Governor gave no sign that the Monetary Policy Committee would be more inclined to tighten monetary policy. Although the MPC suspects inflation could go as high as 4 per cent this year it believes the problem is temporary. The minutes of the June MPC meeting showed as much. There was even the one traditional vote in favour of lower rates from crypto-hawk David Blanchflower.

And there was more gloom from the Governor in his speech at the Mansion House on Wednesday evening. He did not go quite as far as to tell us we were all doomed but in The Telegraph?s opinion "the speech was the most austere yet by Mr King." And that's saying something.

Sterling received boost on Thursday from an astonishingly strong May Retail Sales figure. A 3.5 per cent monthly increase took sales growth for the year to twice the anticipated level. The market's knee-jerk reaction pushed Sterling sharply higher on the news. It later fell back as investors asked themselves if such a performance could really be credible. Their doubts were shared by High Street retailers.

This week began on a low note for Sterling when Rightmove published its monthly index for house prices on its website. Although the index was down by just one per cent on the month and flat for the year there was a serious mismatch between selling interest and buying appetite. For every potential buyer there are 15 properties for sale.

Data from the US economy did nothing to help the Dollar. Federal Reserve regional offices in Philadelphia and New York reported contraction in the manufacturing sector, New York's figure was -8.7 and Philadelphia's was twice as negative. Building Starts and Housing Permits were down again and the NAHB Housing Market Index languished at -18. Industrial Production and Capacity Utilisation both showed further softness in manufacturing.

The US economic picture is giving rise to doubts about the Federal Reserve's commitment to tighter monetary policy. Investors suspect that Fed Chairman Ben Bernanke's fighting talk is no more than that. Senior Fed officials told journalists, off the record, that they believe the market is placing too much reliance on higher US interest rates.

There have already been several reassessments of US and UK interest rate direction and last week's developments did nothing to settle the debate one way or the other. This week brings more important data about the state of the UK and US housing markets and few analysts are optimistic that the news will have improved. The US Dollar and the British Pound are both at risk to the depressing effect that residential property softness has on investors' interest rate expectations. To an extent they are in the same boat so it would not be surprise to see Sterling giving back more of last week's unexpected gains.

With Sterling still not far from long term highs, buyers of the Dollar should take the opportunity to book some at current levels

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