Sterling falls on PMI data
The figures indicated that there would be a slow down in the growth of the economy in the second part of the year. The pound had been enjoying a rise against most currencies, after the tightest budget in a long time seemed to ease investors concerns.
There seems to be a clear gap between the UK method of recovery, and that of the EU and US. We have cut spending in a big way in order to reduce the deficit as soon as possible. Elsewhere, fiscal stimulus continues, as there are fears that cutting too much too quickly could knock the fragile recovery.
Markets seem to prefer the UK method at the moment, and Sterling has been supported as a result. However, yesterdays poor PMI data show that any bad news can still impact Sterling and exchange rates very quickly.
Pound to US Dollar rates rise
Sterling has rallied more than 3% against the dollar over the last month. Concerns about the US recovery in the last week have dented it's safe haven status, and the result is a weaker dollar. We're now trading back above $1.50. There are fears that more fiscal stimulus may be needed, and it's this that has pushed rates up despite the bad PMI figures for the UK.
Where will the pound move over the coming weeks?
Long term, the positive effects of the budget and cuts on Sterling are likely to shine through. Weak economic data over the coming weeks and months however could drive Sterling lower, if economists think that the government have overdone the cuts in the budget.
Medium to long term we expect the pound to continue to gain against the Euro and US Dollar, however in the short term, poor data could well knock Sterling back, as we've seen over the last week.
Despite signs the economy is recovering, there are some analysts that fear a double dip recession that could well hurt the pound significantly. Later this week we see GDP data for the EU and UK, which will give an indication if the recovery is progressing, so we could well be in for a volatile weak for exchange rates.
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