The Pound received a timely boost.
Sterling / Euro and US Dollar exchange rates
Following on from last week, the Pound received a timely boost on Thursday, 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 voting to extend bond purchases. The Pound was generally on the defensive earlier in the week 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 over the coming months.
The Pound remained relatively unchanged against the Euro on Friday, trading at a high of 1.2380 and consolidating on the previous day’s gains following the decision from the Bank of England not to implement additional stimulus measures to support the UK economy. The UK currency traded lower versus the U.S Dollar, reaching a low of 1.5404, after peaking at a high just under 1.56 last night.
Swings in risk sentiment continue to drive the market. The decline in global stock markets also had an impact on the higher-yielding currencies, as the Australian Dollar weakened against the Pound and the Dollar. The Euro declined against the U.S currency for a second day, after reports in Germany showed that exports tumbled in the region, while Italian industrial production contracted, adding to evidence that the debt crisis is sweeping across the region.
UK producer prices fell 2.5% for May following a 1.4% decline the previous month, as energy prices declined and this increased speculation that the Bank of England has the spare capacity to ease monetary policy. Defensive demand for the Pound will remain an important focus in the short-term and relief surrounding the Spanish banking sector could lessen immediate Sterling demand.
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 implement measures to improve the Euro-zone banking sector. The Chancellor Angela Merkel stated that she 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 was persistent speculation over the weekend that Spain was requesting a bailout, although the Spanish government denied the rumours.
Following talks on Saturday, the EU confirmed that up to €100 billion would be made available to support Spanish banks. The precise amount will not be known until Spain finish conducting an audit. There will be significant relief that immediate uncertainty has been eased surrounding Spain. However, the positive sentiment for the Euro may be short-lived with speculation of a rate cut for July.
Data Released Today
No data released.
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