The Pound took advantage of broad Euro weakness to breach the 1.2700 barrier by the close of trading last night despite the mounting concerns surrounding the future of the UK’s largest buy-to-let mortgage lender and the biggest slump in the construction industry for at least 11-years.
The report from the Chartered Institute of Purchasing and Supply showed that activity fell as homebuilding stalled and subsequently the index recorded the lowest numbers since records began in 1997.
A separate gauge of the report showed that housing and confidence had also fallen to record lows as a worsening economic climate means that homebuilders are forced to cut jobs.
The crisis in credit has seen the worst downturn in housing since the end of the last recession in 1991 and the Governor of the Bank of England, Mervyn King, has conceded that the economy may contract at some point over the coming months.
However, the Bank’s monetary policy can’t afford to cut interest rates and provide some relief to the economy because the annual pace of inflation met the government’s 3.0% limit in April.
The MPC convene next Thursday for the UK rate announcement and the Pound may find some support as policy makers are expected keep the benchmark lending rate unchanged at 5.0%.
The Euro made widespread losses against the majors yesterday despite reports that European economic growth accelerated by more than initial forecasts in the first quarter, led by an increase in German business confidence and construction spending.
Gross domestic product across the 15 nations that share the Euro increased 0.8% in the revised estimate for the first quarter as companies weathered higher oil prices and a stronger Euro.
Producer price inflation in Europe has accelerated at the fastest pace since October 2000 in the figures released for April, keeping the pressure on the ECB to maintain a hawkish rhetoric and hold interest rates at 4.0%.
Factory prices rose 6.1% from this stage on 2007 as surging food and energy costs means that manufacturers have little choice but to pass on the deficit to the consumer and subsequently stoke the already elevated inflationary pressures.
As a result, the futures market has all but priced out a move in European interest rates this year but the ECB may need to review their stance over the coming months amid a sustained slowdown in manufacturing and service sector growth.
The Dollar rallied to the highest level in two weeks versus the Euro while the U.S currency also consolidated on the recent gains made against the Pound as the Fed Chairman, Ben Bernanke, indicated that the Reserve Bank have finished cutting interest rates.
The rebound in Dollar sentiment again coincided with a drop in oil and gold prices but the comments from Bernanke served to reassure the market that the Federal Reserve are closely monitoring the implications of a weaker Dollar and may intervene as necessary.
Elsewhere, a report from the Commerce Department showed that U.S factory orders increased unexpectedly in April as a weak Dollar helped spur demand from overseas.
The underlying strength in the manufacturing sector is helping supplement the worst slump in housing for nearly twenty years while soaring fuel prices is weighing on consumer sentiment. The Dollar’s short-term momentum may be tested this week as the focus switches to the monthly U.S job report on Friday.
Data Released 4th June
U.K 09:30 CIPS Services PMI (May)
EU 10:00 Retail Sales (April)
U.S 13:30 ADP Employment Report (May)
U.S 13:30 Labour Costs (Q1)
– NonFarm Productivity
U.S 15:00 Services ISM – NMI/PMI (May)
– Business Activity
written by Adam Solomon
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