Pound to Euro, US Dollar exchange rate: The Pound sank to the lowest level since January against the U.S Dollar


The Pound sank to the lowest level since January against the U.S Dollar.The Pound sank to the lowest level since January against the U.S Dollar.

The Pound sank to the lowest level since January against the U.S Dollar last week and maintained a generally defensive tone through the Bank Holiday weekend. The UK currency traded at a low just above 1.53 versus the Dollar and struggled to bounce back through 1.55, as global risk appetite continued to weaken, spurring demand for the safe haven currencies.

The more defensive tone was emphaised by a mini Euro revival to 1.2350 yesterday and domestic confidence was undermined by a much weaker-than-expected manufacturing PMI index, which showed a decline to 45.9, from a revised 50.2. The level to indicate growth is 50.0 and the slump into contraction territory will increase concerns that the recession is deeper than first feared.

There is already strong speculation that the Bank of England will need to respond to the recent downturn in the economy by increasing stimulus measures through additional quantitative easing. To that end, the focus tomorrow will certainly switch to the BoE interest rate announcement and a move to extend bond purchases would put the Pound under severe selling pressure.

The Pound is also struggling on signs that it is finding it increasingly difficult to gain additional buying support on defensive grounds with fears over the impact of Euro-zone stresses on the banking sector. The Bank of England left policy on hold in May but this month policy makers are armed with new data that has shown the economy contracted by more-than-expected during the first quarter.

Last month, only David Miles was in favour of extending asset purchases beyond the current £325 billion level. However, a number of his colleagues appear to have been close to joining him, with their unchanged decision reported as “finely balanced”. Therefore, the MPC by and large are still open to the possibility of additional monetary support.

In terms of economic data, the focus this week will be on the latest PMIs for May. The disappointing manufacturing figures last week will put added significance on the construction and services reports. Forecasts are for a drop in both readings, which will add to talk that the economy contracted again during the second quarter.

The Euro found support below the 1.23 level against the Dollar and following the U.S non-farm payrolls data on Friday, the single currency rallied to a high above 1.25, as the market corrected from overly-sold positions. Spain will remain a very important focus in the market, as fears surrounding its banking sector continued to intensify.

The Spanish Finance Minister also admitted that credit markets were closing down for Spain. There were increased fears over the banking sector and the ability to fund the budget deficit. There were reports that Germany was pushing Spain to accept a bailout from the IMF and EFSF and rumours that Spain was resisting these pressures.

There was no comfort from Euro-zone economic data, as reports showed that retail sales plunged 1% for the month of April. The ECB meeting on Thursday will be a key event in the week with strong pressure for the central bank to implement additional policy measures. In the U.S, the ISM non-manufacturing edged higher to 53.7, from 53.5 previously.

Data Released Today

U.K 09:30 Construction PMI (May)

EU 10:00 Revised GDP (Q1)

GER 10:00 Industrial Production (April)

EU 12:45 ECB Interest Rate Announcement

EU 13:30 ECB Press Conference

U.S 13:30 Revised Productivity (Q1)

– Labour Costs

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