by Adam Solomon
The Pound remained lower against the majority of the 16 most actively traded currencies yesterday, after the Bank of England left interest rates on hold at a record low of 0.5% and there are few signs that the MPC would be willing to raise with the UK economy in a fragile state. The BoE also maintained its bond purchase program to help boost the recovery but there was no increase in the plan, which will tend to boost the Pound.
Some policy makers have made comments that suggest further quantitative easing may be on the table during the third quarter, as the government cuts and high inflation weigh on growth. The Pound also struggled to gain momentum following reports yesterday that UK manufacturing rose at the fastest pace in over a year in May.
While manufacturing has driven the recovery away from contraction this year, recent data has suggested that output growth may be slowing in the face of the government cuts, while rising prices curtails consumer confidence and weakens global demand. The Pound actually rallied against the Euro, testing resistance just above 1.12, after the ECB raised interest rates in the Euro-zone.
In the three months through May, manufacturing declined 0.2% from the previous quarter, while industrial production fell 1.5%, which suggests the sector will hamper growth in the second quarter. According to a report yesterday from the National Institute of Economic and Social Research, the UK economy probably expanded just 0.1% between April and June following its 0.5% expansion in the first three months of the year.
The report may provide an insight in the official second quarter growth figures, which are released later this month. The first quarter growth rate just about wiped out the fourth quarter contraction from last year and early indications are that the economy expanded at an even slower rate in the three months to June, raising concerns of a contraction.
The outcome of the announcement yesterday was widely anticipated and as such the Euro remained lower against the U.S Dollar and the Pound. UK government bonds fell yesterday, as stocks gained worldwide on reports that the U.S economy added more workers than expected last month. The pessimistic outlook for the UK economy softened a little yesterday, with some investors anticipating that growth may accelerate in the second half of the year and that will prompt the Bank of England to raise interest rates by November.
The Pound remained under 1.60 against the U.S Dollar yesterday, trading in a tight range with lows towards 1.5960, despite UK stocks rising 0.9% in London. Short-Sterling futures still suggests that the central bank won’t raise rates until May 2012 but any suggestions that a rate increase may happen this year will tend to strengthen the Pound.
The Pound came under further selling pressure this morning, falling to a one-week low versus the Dollar before a report that is expected to show UK producer price inflation slowed in June. The UK currency was weaker against all of the 16 most actively traded currencies, as the cost of goods at factory gates increased just 0.1% from the previous month, negating the urgency for a rise in borrowing costs.
The Euro exchange rate bounced back against the U.S Dollar yesterday, after the European Central Bank raised interest rates by another 25 basis points taking the benchmark rate to 1.5% and extending the yield advantage over the U.S and the UK. The result of the announcement was widely anticipated, as the chairman Jean-Claude Trichet gave strong indications through the course of the month that a rate hike was likely.
As ever, the focus fell on the tone and language used in the accompanying press conference and Trichet used the opportunity to signal that more rate increases are likely over the coming months. He also said that policy makers loosened collateral rules for Portuguese bonds to support local banks. Trichet maintained that current monetary policy remains accommodative and said that inflation is likely to rise in the medium term.
The Dollar declined on reports that U.S companies added more workers to payrolls in June than previously anticipated. The improvement in labour market sentiment helped spark demand for riskier assets, reducing demand for safe haven currencies like the Dollar, Yen and Swiss Franc. The report will also provide an insight into the nonfarm payrolls report this afternoon, which is expected to show that the economy added 105,000 jobs in June.
U.K 09:30 – Producer Price Index (June)
U.S 13:30 – Non-Farm Payrolls (June) – Unemployment Rate – Average Hourly Earnings
U.S 15:00 – Wholesale Inventories (May)
U.S 20:00 – Consumer Credit (May)
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