The Pound declined against the majority of the major currencies.
The Pound declined against the majority of the major currencies yesterday, as the worsening economic outlook leads to increased speculation that the Bank of England will sanction additional stimulus measures during the monthly announcement today. The MPC voted to keep the bond purchasing program on hold in May but this month, policy makers are armed with new quarterly data that has revealed the UK economy is in a deeper slump than was first feared.
The latest PMI manufacturing data last week showed a sharp contraction in growth in the sector for the month of May, while the construction data yesterday also failed to improve sentiment. There will be a lot of emphasis placed on the PMI services sector report and a weak figure could prompt a renewed bout of Sterling weakness.
Also, the speculation of further quantitative easing has been enough to weaken the Pound, but if policy makers follow through and loosen policy this lunchtime, the Pound is likely to come under intense selling pressure. The UK currency found support on dips towards the 1.5425 area against the Dollar and pushed strongly higher to a peak above 1.55 on reports of Middle East demand.
The UK construction PMI index edged lower to 54.4, from 55.8 the previous month, as order growth deteriorated, although there was still no evidence of the type of weakness reported in the official data. The services sector data is due ahead of the BoE rate announcement and will be important for underlying sentiment, potentially justifying a move towards additional quantitative easing.
The Pound did gain some protection for an improvement in risk appetite and, in this context, the potential Sterling losses from further purchases may be limited by expectations that there will be concerted global attempts to boost demand. The Pound stalled close to 1.55 against the Dollar last night, with the BRC retail sales survey showing an increase of 1.3% for May.
The Euro consolidated around 1.25 against the Dollar ahead of yesterday’s ECB interest rates decision and accompanying press conference. There were also persistent fears surrounding Spain, as rumours that it was requesting EU aid were denied. Hopes for Spain to receive direct support for the banking sector have been quelled by tough resistance by Germany.
The economic data in the Euro-zone also failed to inspire confidence with German industrial production falling 2.2% in April. Prior to the ECB rate decision, there was a minority view that the central bank would cut interest rates, but the benchmark rate was left on hold at 1%. The chairman Mario Draghi stated that downside risks to growth had increased, which reinforced the mood of pessimism over the outlook.
Draghi also admitted that the decision to hold interest rates was not unanimous, indicating that divisions are forming on the governing council. In the U.S, Regional Fed President Lockhart stated that concerns surrounding the U.S outlook had increased and, although there was no immediate need for additional QE, he also stated that it could not be ruled out if economic conditions deteriorated.
Data Released Today
U.K 09:28 CIPS Services PMI (May)
U.K 12:00 BoE Interest Rate Announcement
U.S 13:30 Initial Jobless Claims (w/e 2nd June)
U.S 20:00 Consumer Credit (April)
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- Daily Foreign Currency Exchange Rate News Flash – Pound declined against the majority of the major currencies yesterday
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