Summer doldrums end a week early

August is typically a month of slow trading days and long lazy evenings. This August however, has been nothing of the sort.

Fears over the state of the US economy have forced traders and investors, treasurers and speculators to return to their desks and deal with the increasing concerns.

Headlines have surrounded the recent housing market problems in the US but we have also recently seen poor retail sales, bad consumer confidence and awful export data.

The US economy is steaming towards a double dip recession and with a GDP measure due this afternoon expected to show that growth is still slowing, the picture is only likely to get worse in the near future.
 
How this affects the foreign exchange markets is tricky. Normally poor data for a country would mean that the currency would tend to lose ground.

The US dollar, however, is a strange one in that it will strengthen when world or US data is suitably poor. Investors rush into what they see as a safe asset if they believe the rug is being pulled out from underneath them.

As a result, I would expect to see further US dollar strength in the coming weeks as the global economic picture starts to darken once again.
 
Sterling meanwhile has been able to secrete itself away, but it was turned on by the market when Martin Weale, the newest member of the Monetary Policy Committee, said it is impossible to rule out the possibility of a double dip recession in the UK.

He added that the Bank of England’s growth prospects of 2.8% in 2011 and 3.2% in 2012 may be slightly over-optimistic.

It is obvious from these comments that Dr Weale is joining the dovish side of the decisions camp and as a result the prospect of near-term rate rises in the UK have been marked downwards.

Jeremy Cook, chief economist at World First, 27.08.2010