The Pound rallied through 1.24 against the Euro.
Sterling / Euro and US Dollar exchange rates
The Pound rallied through 1.24 against the Euro yesterday, as concerns over the European debt crisis continues to undermine the single currency, amid speculation that Italy may follow Spain in requiring a bailout. The UK currency did lose ground against the U.S Dollar, after a government showed that UK manufacturing fell by more than initial estimates in April, adding to the increasingly negative economic outlook.
The fragility of the manufacturing sector has been all too evident in the second quarter and the UK economy may be in a deeper recession, forcing the Bank of England to consider resuming the asset purchase program next month. Indeed, BoE policy maker Adam Posen was speaking on Monday and said that he regretted withdrawing his recommendation for additional stimulus in May.
The report from the Office of National Statistics yesterday showed that factory output dropped 0.7% from May, despite expectations of a modest 0.1% drop. The Pound encountered resistance above 1.5580 against the Dollar, but was generally resilient and found support on dips towards 1.55. A separate report from the National Institute of Economic and Social Research estimated that the UK economy grew 0.1% in the three months to May, from a revised 0.1% decline the previous month.
The report did little to inspire confidence surrounding the second quarter growth outlook and there was further speculation of additional Bank of England policy easing. There was further evidence of defensive demand for the Pound as an alternative to the Euro-zone even though there fears that the UK economy would be severely damaged if the Euro-zone stresses continued to increase.
The Pound remained above 2.00 against the New Zealand Dollar and 1.56 versus the Australian Dollar, as the higher-yielding currencies continued to struggle, amid concern that Greek elections this weekend will enhance concerns over the debt crisis and reduce demand for the riskier assets. The Aussie in particular weakened, after consumer confidence slumped to close to the lowest level this year.
Euro / US Dollar
The Euro encountered strong resistance in the region of 1.2520 against the Dollar, as underlying sentiment in the Euro-zone remained very weak and risk conditions continued to dominate market trends. There were continuing fears surrounding Spanish debt following the rapid reversal and rise in yields earlier in the week.
Benchmark 10-year yields increased to close to the highest level on record above 6.8% with sovereign debt fears intensifying following further bank downgrades by the ratings agency Fitch. There was also further selling pressure on Italian bonds, as markets feared that Italy would slide towards needing a bailout package too.
Greek political debate also remained an important focus through the day with elections due this Sunday. In the U.S, the latest budget deficit was broadly in line with expectations, while a separate report showed that consumer confidence edged lower. The Euro retreated towards near-term support around 1.2450 last night.
Data Released Today
EU 09:00 ECB Monthly Bulletin Published
EU 10:00 Industrial Production (April)
U.S 13:30 Producer Price Index (May)
U.S 13:30 Retail Sales (May)
U.S 15:00 Business Inventories (April)
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