GBP to EUR today: Pound slips on latest data

Wednesday, 01 June 2011 10:08

The pound to euro exchange rate (GBP to EUR) has faltered in morning trade after the latest data out of the UK economy disappointed.

Manufacturing activity grew at its slowest pace in 20 months in May, and weaker export and consumer demand led to the first drop in new orders in two years, fuelling fears about the pace of the recovery.

The Markit/CIPS manufacturing PMI headline index, published on Wednesday, fell to 52.1 last month from a downwardly revised 54.4 in April, well below the 54.1 consensus forecast.

The worst headline reading since September 2009 was blamed on a weaker domestic market, particularly for consumer goods, and the slowest growth in export orders in eight months. Extra public holidays also reduced activity.

GBP EUR rallied to a high above 1.6 yesterday, as the global improvement in risk appetite spurred demand for higher-yielding assets and reduced demand for the so-called safe haven currencies.

UK stocks surged higher for a fifth consecutive day, representing the longest winning streak in two months, this proved supportive to GBP EUR.

The improvement in global stock markets stemmed from speculation that European Union leaders will step up aid to Greece and that an expanding global economy will propel earnings. The FTSE 100 Index was up 0.9% by the close of the European session last night, while crude oil prices climbed more than 1.5%.

The possibility that Greece won't have to restructure its debt has also helped the Euro, as the single currency traded back towards 1.14 against the Pound and 1.4450 versus the Dollar. Speculation about Greece and the ongoing issue with sovereign debt in the region dragged stocks down by 1.7% over the past two months and the recent improvement will be treated with caution.

UK bonds and the Pound rallied last week, as investors sought a diversification away from Euro-denominated assets, amid renewed concerns over the sustainability of a number of high-deficit region in the Euro-zone. The UK currency may extend its recent rally against the U.S Dollar towards 1.6750 should the market get above the May 11th high of 1.6520.

The resurgence in the Pound will be largely driven by interest rate speculation with the MPC debating the timing of the first increase. The panel has been split three ways on whether to implement an increase in borrowing costs to tame inflation, but one member Andrew Sentance, who has voted for a 50 basis point increase for the past three months has now left the committee.

UK consumer prices have surged higher towards the highest level in two-years and the BoE governor Mervyn King has warned that inflation will probably breach the 5% level over the coming months. Nevertheless, the BoE face a difficult balancing act and the majority of the MPC are concerned that a rate hike at this stage of the fragile recovery could plunge the economy back into the depths of contraction.

The British Chambers of Commerce reported earlier this week that it has pushed back its forecast for the first increase in UK interest rates to August from May and cuts it growth prediction for the year to 1.3% from 1.4%. The focus this morning will fall on the CIPS manufacturing PMI, which is expected to ease back in the official figures for May, while UK mortgage approvals probably remained largely unchanged for the month.