The Euro continued to gain ground against the U.S Dollar yesterday and worked up towards near-term resistance at 1.32.
by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound received a timely boost yesterday as a gauge of UK manufacturing unexpectedly showed that growth returned to the sector in January and rose to the highest level in eight months. The UK currency rose through 1.58 to a 5-month high against the Dollar and consolidated on yesterday’s gains versus the Euro, as factory output increased following a quarter of contraction.
The gauge rose to 52.1 from a revised 49.7 in December with a level about 50 indicating growth in the sector. Separate reports showed that manufacturing in Europe, China and India also rose in January, which increased investors’ demand for riskier assets and weakened the Dollar’s position as a safe haven.
The UK manufacturing figures were a real surprise considering that Europe, the biggest UK export market, has been engulfed in sovereign debt crisis, which was thought to have clouded the outlook for factory production this year. It is difficult to say whether this trend is sustainable but the boost in output will be a welcome relief to Bank of England officials, who will be considering whether to implement further quantitative easing measures next month.
The Pound maintained a firm tone against the Dollar and pushed to highs above 1.20 versus the Euro. The UK currency is still being influenced strongly by swings in risk sentiment a firm global tone helped boost the UK stock market as well as Sterling. The FTSE 100 Index rose by the most in a month, as manufacturing gauges in China and the U.S rose and increased optimism that growth in the world’s largest economies will boost earnings potential and spur demand.
The benchmark FTSE 100 Index rose 1.9% by the close of trading last night and the gauge rallied 2% in January to record its second consecutive month of gains. The positive sentiment has fed into risk appetite and enhanced demand for the higher-yielding assets. The Australian Dollar has rallied to the highest level against the Pound since 1985 in the first quarter, as global growth increases its appeal.
Elsewhere in the UK yesterday, the Nationwide house price index recorded a 0.2% decline for the second successive month, maintaining the recent soft tone of the housing sector. The Pound will also be vulnerable to speculation that the Bank of England would move towards additional quantitative easing within the next month.
Euro / US Dollar exchange rates
The Euro continued to gain ground against the U.S Dollar yesterday and worked up towards near-term resistance at 1.32, although the move was largely driven by U.S weakness rather than Euro strength. The Euro-zone PMI manufacturing index edged higher but any optimism was tempered by the fact that indices in Greece, Spain and Italy all remained significantly under the level to indicate growth.
The latest Euro-zone consumer price inflation report was unchanged at 2.7% for January and markets still expected the ECB to cut interest rates further during the first quarter. There was further speculation over an imminent Greek private sector debt restructuring deal, although again there was no actual announcement of a deal, which undermined Euro support versus the Pound.
In the U.S, the latest ADP employment report was marginally weaker-than-expected with a 170,000 increase for January, but there was still a strong two-month increase following a revised 292,000 gain the previous month. Elsewhere, the ISM index rose to 54.1 from a revised 53.1 the previous month, indicating strong growth in the sector, which further boosted risk appetite and weakened demand for the Dollar as a safe haven.
Today’s Exchange Rate Data
U.K 09:30 – Construction PMI (January)
EU 10:00 – Producer Price Index (January)
U.S 13:30 – Initial Jobless Claims (w/e 28th January)
U.S 13:30 – Productivity / Labour Costs (Q4)
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