Pound Euro: Key data events for the week ahead

Monday, 16 May 2011 10:32

GBP to EUR is currently 0.076% higher on the day with 1 GBP = 1.1470 EUR.

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The Pound to Euro weekend on Friday after the flash estimate of European gross domestic product in the first quarter showed that growth in France and Germany exceeded initial estimates.

Although the peripheral economies in the Euro-zone are struggling with debt levels and Greece faces the uncertain prospect of restructuring, Germany, in particular, is showing signs that the economic recovery is gathering momentum, increasing the prospect of higher interest rates.

This morning we see some mild support for GBP EUR, whether this can be extended will depend on the key data releases that are due this week.

UK inflation data will be watched closely and a headline figure in excess of 4% would fall in line with the Bank of England's projections that consumer prices are set to trend higher in the near-term.

A rise in inflation would also spur speculation that the MPC will raise interest rates before the fourth quarter and that should support the Pound. Other key UK report will include retail sales figures for April, which will probably show a positive result considering the number of Bank holidays in the last month and the Royal wedding. The unemployment rate is expected to edge higher, while house price data from Rightmove and DCLG also feature.

Following on from last week, the Pound continued to decline against the U.S Dollar, dropping to a low of 1.6189 on Friday, while the UK currency also traded lower versus Euro, amid renewed concerns that the UK economy is drifting back towards negative growth in the second quarter. Recent economic data has shown that the key sectors of the economy are slowing and a report last week showed that UK manufacturing came in short of expectations in March.

Output at UK factories climbed just 0.2% from the previous month and overall industrial production rose 0.3%, despite initial estimates of a 0.8% increase. The report confirms that during the first quarter, production rose just 0.2%, clouding the economic outlook even further following declines in services, housing and consumer spending. Recent economic reports don't even take into account the full extent of the government's fiscal spending cuts and growth in the economy will probably deteriorate further over the coming months.

The Pound also came under further selling pressure against the Dollar as UK stocks slumped and commodity prices drifted lower. In the Bank of England's quarterly inflation report, the governor Mervyn King said that while policy makers believe the recent "softness" in the UK economy will be temporary, there are clear "downside risks", leading to a downgrade of growth projections this year.

The UK economy grew just 0.5% in the first quarter, lower than expected, and barely enough to erase the contraction from the fourth quarter of 2010. Although the industrial production data was weaker-than-expected, the index for manufacturing is now at its highest level since October 2008. There is every chance that the growth figures from the first quarter will be revised higher, but the risks to the economy are very much weighted to the downside.