by Adam Solomon
Sterling / Euro and US Dollar
The Pound declined against all of the 16 most actively traded foreign currencies yesterday, falling below 1.14 versus the Euro exchange rate, after a report from the Chartered Institute of Purchasing and Supply showed that UK manufacturing expanded at the slowest pace in nearly two years last month. A gauge based on a purchasing managers’ index declined to a reading of 52.1 in May, the lowest output since September 2009, and the Pound declined as the extent of the drop was in excess of initial forecasts.
Factory output and new orders declined for the first time since July 2009, as weak domestic demand led to a drop in production, while underlying stresses in the Euro-zone curbed demand for UK exports. The government’s aggressive deficit reduction plan has hampered consumer confidence, while accelerating inflation has affected households’ disposable income.
The drop in manufacturing output and slowing demand for new orders will be of particular concern to officials, amid concerns that the UK economy may struggle to sustain the anaemic pace of expansion from the first quarter. Higher commodity prices are also squeezing companies’ margins, as a measure of factory-gate inflation rose to a near record level last month.
The Pound also came under renewed selling pressure against the major foreign currencies, after a separate report showed that UK mortgage approvals dropped to the lowest amount in four months in May. The reports combined will add to speculation that the Bank of England will keep interest rates at the lowest level on record for the remainder of the year, as policy makers try to balance a weak economic against rising consumer prices.
The US Dollar exchange rate benefited from the subsequent increase in risk aversion, while the Euro weakened amid renewed uncertainty over the Greek debt situation, spurring a diversification away from the single currency. However, the Pound extended its decline against the Euro through the Asian trading session last night, falling as low as 1.1335.
The Pound slipped 0.5% against the U.S Dollar overnight, after U.S manufacturing expanded for the 22nd consecutive month in May. The global decline in factory output sent stock and commodity markets sharply lower on the day, increasing demand for the Dollar as a safe haven. Former Bank of England policy maker Andrew Sentance, who left the MPC at the end of May, was speaking on Sky News yesterday and said that the inflation rate at more than double the Bank’s 2% target may be hurting economic growth.
The negative outlook for the UK economy has been enhanced following the sharp decrease in some of the key sectors of the economy, prompting many investors to scale back interest rate expectations. JPMorgan Chase Co have pushed back their forecast to November from August but there are some forecasters that believe it is unlikely that rates will be altered this year.
The Pound slipped for a third straight day against the U.S Dollar exchange rate before a report this morning that is expected to show UK construction expanded at a faster pace in May. The UK currency was also down for a third day against the Euro exchange rate, as the construction PMI is expected to edge up towards 53.5 last month. The UK’s Debt Management Office is due today to auction £3.5 billion of 3.75% bonds due in September 2021.
Euro / US Dollar
The Euro exchange rate weakened against the majority of the 16 most actively traded currencies yesterday, as renewed uncertainty over the Greek debt situation reduced the appeal of European assets. The single currency slumped from a three-week high against the Dollar, amid concern that EU officials will fail to prevent the Euro-zone’s first sovereign-debt default.
The Euro bounced back against the US Dollar exchange rate and the Yen last night, after the German Chancellor Angela Merkel said that the EU remains committed to its shared currency and that the outlook for the German economy is very positive. Accelerating growth in Germany and France may prompt the European Central Bank to raise interest rates again over the Summer and that will underpin support for the Euro.
The Euro exchange rate was trading higher against a basket of currencies before the ECB president Jean-Claude Trichet speaks in Germany today. He recently said that the Central Bank “will continue to deliver price stability” – a sign that the governing council have retained a tightening bias and a similar use of language in the ECB meeting next week will spur speculation of a July increase.
U.S 13:30 – Initial Jobless Claims (w/e 28th May)
U.S 13:30 – Productivity (Q1)
U.S 15:00 – Factory Orders (April)