GBP lacking support
UK house prices have dropped at their fastest rate for 19 months with, prices falling 4.1% in the three months to May. This is a trend that is likely to continue in the near term, with, mortgage approvals a leading indicator of house prices dropping in April. This is as first time buyers struggle to raise the equity to get on to the property ladder due to high inflation and higher taxes.
Further, pressure was exerted on Sterling yesterday by the UKs poor retail sales figures which dropped by 2.1% in May. This figure is probably a more realistic assessment of the state of the UK high street than the recent levels which have been distorted by the late timing of Easter and unseasonably warm weather. Euro retail sales on the other hand surprised to the upside rising by 1.1% in May.
Perhaps, the most worrying news for Sterling was the news report that Moody’s could cut the UK’s triple AAA rating if growth remains subdued and the government failed to meet its fiscal consolidation targets. This would be disastrous for the UK economy as the costs of servicing UK debts, which, the UK government is already trying to cut, would increase. However, given the IMFs support for the UKs fiscal consolidation it seems unlikely that there is much substance to this downgrade story.
Last night, saw the return of risk aversion in the market after comments from Ben Benanke, chairman of the FED, who stated that; growth has been slower than expected and remained uneven. On top of this there was no suggestion from the FED that QE3 was being considered which the markets had been hoping for to create fresh stimulus in the economy.