Pound to Euro, US Dollar exchange rate: The Euro unexpectedly rallied through the course of Thursday

Currency

The Euro unexpectedly rallied through the course of ThursdayFitch also expressed concerns surrounding the U.S budget outlook and warned that there could be a downgrading of the AAA U.S credit rating if there were no cohesive measures to curb the deficit over the coming months.

Sterling / Euro and US Dollar exchange rates

The Pound received a timely boost Thursday lunchtime, after the Bank of England voted against additional quantitative easing this month and also left interest rates unchanged at a record low of 0.5%. The immediate reaction in the market has seen the Pound edge higher against the majors, as there was widespread speculation that the MPC could sanction additional stimulus measures to protect the UK economy from the emerging downside risks from the Euro-zone debt crisis.

Also, the UK economic outlook has worsened over the last quarter, with the revised estimate of GDP showing a deeper contraction in the first quarter. Recent data has shown the key sectors of the UK economy are weakening, particularly manufacturing, which contracted by much more-than-expected in the past month.

However, policy makers continued to adopt a wait-and-see approach and we will have to wait for the minutes to be released in a couple of weeks to see if any members joined David Miles in voted to extend bond purchases. The Pound was generally on the defensive earlier in the day before gaining ground with a sharp move higher following the BoE announcement.

Sentiment was initially supported by stronger-than-expected UK PMI services-sector data with the key index unchanged at 53.3 for May. There was also a 0.5% monthly increase in house prices according to the latest Halifax house price index. The data dampened speculation that the BoE would engage in further quantitative easing to support the economy.

Prior to the midday announcement, there was widespread speculation that policy makers would increase bond purchases from £325 billion this month and the Pound gained significantly following the decision with a peak close to 1.56 against the Dollar. The upward momentum didn’t last too long, as the Pound retreated back under 1.55 over-night, as risk conditions deteriorated again, supporting demand for the Dollar as a safe haven.

Euro / US Dollar

The Euro unexpectedly rallied through the course of Thursday, as risk appetite increased and hopes that the German government would soften to measures to improve the Euro-zone banking sector. The Chancellor Angela Merkel stated that it will back the use of all existing tools to improve sentiment but refused to back measures to provide direct support.

The credit rating agency Fitch downgraded Spain’s sovereign rating by three notches to BBB, the lowest rating of the major agencies and maintained a negative outlook. There were further concerns surrounding Spain with fears that the economy was too large for existing mechanisms to deal with. There has been speculation that Spain will require a bailout shortly, as credit conditions continue to worsen.

Fitch also expressed concerns surrounding the U.S budget outlook and warned that there could be a downgrading of the AAA U.S credit rating if there were no cohesive measures to curb the deficit over the coming months. U.S jobless claims fell to 377,000 in the latest weekly data, from 389,000 the previous week, which did provide a degree of support for the Dollar on yield grounds.

Data Released Today

U.K 09:30 – Producer Price Index (May) – Output

U.S 13:30 – International Trade Balance (April)

U.S 15:00 – Wholesale Inventories (April)

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