by Adam Solomon
Sterling / Euro and US Dollar
The Pound declined heavily against the Euro exchange rate yesterday, falling to the lowest level since March 2010, after a report showed that UK manufacturing slowed by more-than-expected in April. The report from the Chartered Institute of Purchasing and Supply dropped to a reading of 54.6, the worst result in seven months, emphasising the risks to economic growth.
The Bank of England have displayed a real reluctance, as a collective majority, to consider raising interest rates with the recovery at this fragile stage and there have been suggestions that rates will remain on hold for the next 12-months. The Pound also slumped against the majority of the 16 most actively traded currencies, falling towards 1.5150 against the Australian Dollar, a record low, while the UK currency also plunged to 1.6480 versus the U.S Dollar.
The gauge of manufacturing, based on a survey by Markit Economics, slumped amid a decline in consumer confidence and falling construction orders over the past month. The report indicates that the recovery in manufacturing earlier in the year, largely due to a weak Pound, is losing momentum, amid the biggest fiscal cuts in the post-war era.
Domestic demand is falling as the cuts take hold with consumer confidence and spending waning. The outlook for manufacturing outlook has declined and the report yesterday may provide an insight in to the performance of the economy over the next quarter. If other key components of the economy also decline like services, housing and retail growth, speculation will intensify that the already fragile recovery may be dragged back into recession territory.
The Pound lost more than 1% against the U.S Dollar yesterday before a modest improvement towards the close of the European session. The UK currency plunged to a 14-month low against the Euro and a move under 1.10 appears increasingly likely in the short-term, with some investors speculating that the ailing Pound could trade as low as 1.07 over the Summer.
According to the report yesterday, the rate of growth in a measure of total order books slowed to an eight month low and a deterioration in new business reflected a declining domestic market. Exports rose on higher demand from the U.S, Europe, China, Russia, the Middle East and Turkey. The UK economy expanded just 0.5% in the first quarter, which just about erased the fourth quarter contraction.
During the first quarter, manufacturing expanded 1.1%, while construction shrank 4.7%, the most in two years. The 0.5% growth was largely attributed to the improvement in UK service sector growth in the period but with retail sales and consumer confidence on the slide, the outlook for the economy is looking decidedly bleak and the Bank of England couldn’t raise interest rates in this climate.
The Monetary Policy Committee has been split on whether economic growth is strong enough to withstand the government cuts. Andrew Sentance has voted to raise interest rates by 50 basis points to 1%, while Spencer Dale and Martin Weale have also been pushing for a rate hike to combat inflation, which is still double the government’s 2% target.
It’s a difficult balancing act for policy makers and with inflation falling 0.4% in March and growth slower-than-expected in the first quarter, money markets have reined in expectations of a rate increase this year. The BoE will announce its next policy decision on Thursday and a ‘no change’ is expected to be the outcome.
The Pound has also weakened against 10 out of the 16 most actively traded currencies this morning, after a report from the Nationwide Building Society showed that UK house prices fell for the first time in three months. The UK currency also came under further selling pressure, as investors await a report that is expected to show construction growth also slowed in April.
Euro / US Dollar
The Euro encountered support in the region of 1.4760 against the U.S Dollar yesterday in the foreign exchange rate markets and rallied strongly through the course of the day, as speculation that the ECB will raise interest rates again over the Summer dominates the market. It seems just a matter of time before the Euro stages an assault on the coveted 1.50 level, but risk conditions will play an important role.
The Dollar and the Yen received a boost last night, amid speculation that China will introduce additional tightening measures to combat rising inflation, which increased demand for safe haven assets. A drop in Asian stocks and commodity prices also had a bearing on risk appetite and the New Zealand Dollar dropped to a the lowest level in 2-weeks.
Global equity-market trends will remain a significant factor, especially given the substantial capital flows into emerging markets. The U.S employment data will be watched closely this afternoon, as investors look for an insight into non-farm payrolls later this week. In the Euro-zone, Portugal announced that it had agreed a €76 billion bailout package, but attention was focused on other peripheral economies with Euro-zone debt markets subjected to selling pressure.
U.K 07:00 – Nationwide House Prices (April)
U.K 09:30 – Consumer Credit (March)
U.K 09:30 – Mortgage Approvals (March)
U.K 09:30 – Land Registry House Prices (March)
EU 08:58 – Manufacturing Services PMI (April)
EU 10:00 – Retail Sales (March)
U.S 13:15 – ADP Employment (April)
U.S 15:00 – ISM Non-Manufacturing (April)