The Pound fell to the lowest level in two weeks against the Dollar yesterday, closing well under 1.9600 last night after an industry report showed that growth is slowing amid fresh concerns that the downturn in housing and shrinking consumer confidence will send the UK economy to the brink of recession.
Service sector growth unexpectedly contracted for the first time in five years while a separate gauge of the report showed that consumer sentiment fell to the lowest level since the survey began in 2004.
The CIPS index fell to a reading of 49.8 in May and a reading below 50 indicates contraction as companies cut jobs at the fastest pace since 1996. The Pound also declined against the Euro in the aftermath of the report as the focus switches to the Bank of England interest rate announcement tomorrow and despite fresh fears over an economic slowdown, rising inflationary pressures means that policy makers are unlikely to lower borrowing costs.
UK service industries account for roughly three quarters of the economy while industrial production has showed signs of struggling following the record increase in the cost of raw materials.
The Euro rallied higher against the Pound yesterday but the single currency struggled to stem the losses versus the Dollar after European retail sales fell 2.9% in April, which was more than three times initial forecasts as record high fuel and costs weighed on consumer confidence.
The EU report showed that the annual drop in sales was the largest since records began in 1995 while consumer price inflation rose to a 16-year high last month as oil prices doubled in the past year to peak at $135 a barrel.
The data reinforces concerns over the future outlook for the Euro-zone economy but the ECB are determined to focus on fighting inflation with some members of the governing council even suggesting that a rate hike may be necessary in order to rein prices and provide some relief to the consumer.
The Euro fell 0.2% against the Dollar yesterday but the single currency may continue the upside momentum versus the Pound as the ECB Chairman, Jean-Claude Trichet, is expected to reiterate his concerns over inflation.
The recent hawkish rhetoric from the Chairman of the Federal Reserve, Ben Bernanke, has helped the Dollar rally against most of the 16 most actively traded currencies while the upside risks to price stability means that policy makers may even need to raise interest rates by the turn of the year.
In terms of economic data, growth in U.S service industries slowed less than expected in May, following an increase in factory orders and a slowing labour market.
The ISM non-manufacturing index, which accounts for almost 90% of the economy, increased to a reading of 52.0 in April, while a separate report from the labour market showed that non-farm productivity accelerated beyond initial forecasts in the first quarter.
Data Released 5th June
U.K 12:00 BoE Interest Rate Announcement
EU 12:45 ECB Interest Rate Announcement
EU 13:30 ECB Press Conference
U.S 13:30 Initial Jobless Claims (w/e 31st May)
written by Adam Solomon
Related posts:
- The Pound continues to decline against the Dollar as growth in the UK service sector slows in April
- The Pound declines against the majors as UK service sector growth weakens to the slowest pace in five years
- The Dollar rallies against the majors, dropping through the $2.00 barrier for the first time in a week
- The Pound declines against the Dollar but rises to a two week high versus the Euro despite a 0.4% drop in retail sales
- The Dollar falls to a fresh two-year low against the Euro while also dropping to the lowest level in six weeks versus the Euro
