Sterling begins higher against the US dollar following the Federal Reserve’s announcement that it has downgraded its view of the economic outlook. The news has served to fuel speculation that the world’s largest economy could potentially be slipping back into recession. Sterling itself had come under significant selling pressure as house price and retail sales data both disappointed investors and served as a reminder that the British economy also faces stiff challenges in the months ahead.

Sterling

Sterling dropped by over one per cent against the US dollar as markets largely ignored the news that the UK’s trade deficit had shrunk by more than expected in June. Investors instead opted to focus on disappointing retail sales and house price data. Retail sales only grew by 0.5 per cent in July as fears over widely anticipated government spending cuts hit consumers. This represented a significant decline from the 1.2 per cent rate of growth posted in July.

US dollar

The US dollar could come under renewed selling pressure following the Federal Reserve’s announcement that it had downgraded its view of the economic outlook; appearing to acknowledge the possibility of a “double-dip” recession. At the same time, the Fed also stated that it would start to re-invest the proceeds from its mortgage-backed securities back into US Treasury bonds.

Euro

In the absence of key data released, the single currency remained more or less sidelined and trade was driven by events in other markets. Against sterling the euro was left little changed, while risk aversion kept the euro under pressure against the US dollar.

Japanese yen

The yen benefitted from broad-based support after the Bank of Japan made no change to its monetary policy at its latest meeting. Significantly, bank officials made no reference to the strength of the yen, which last week hit a nine-month high against the US dollar. Markets had feared the possibility that the Central Bank would intervene in markets to weaken the yen and offer support to the key export industries. Instead, policy-makers delivered a relatively bullish statement, stating that the economy had shown signs of a moderate recovery.

Commercial Foreign Exchange Travelex Malta, freephone: 800 733 22), www.travelex.com/mt/

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