Thursday 2nd February 2012
Good morning. Sterling levelled off around the €1.20 level against the Euro yesterday, as markets repositioned the Euros value for the start of the month. Overall, the Pound gained, especially against the US Dollar after better than expected UK manufacturing PMI data meant markets are wondering about the level of QE expected next week from the Bank of England (BoE). Below shows how the rates moved throughout the day.
~Currency Movements on Wednesday 1st February 2012~
Pound surges against the US Dollar
Yesterday the pound gained well against the Greenback. We started the day in the low $1.57's however by later afternoon the rate had risen to the mid $1.58's. This represents the best buying levels for US Dollars in nearly 3 months.
The main reason for the gain was the fact Sterling was supported by a surprise return to growth in the UK's manufacturing sector. This in turn means the QE from the BoE next week may not be as high as the £75bn estimated, and as a result the Pound gathered some strength and GBP/USD rates went up.
Pound lags against the Euro
Despite the gains against the Dollar, Pound/EUro rates actually fell slightly yesterday. BUt with good UK data pushing the Pound up, why didn't it go up against the Euro?
It's simply because the euro outperformed the Pound. The single currency was bolstered by higher than forecast German PMI data. The data suggests higher interest rates may be on the cards in the Eurozone, and this gave the Euro strength and pulled GBP/EUR rates down, despite the good UK figures. The Euro however is likely to run into selling at higher levels given mounting worries that the sovereign debt crisis could spread to bigger economies.
Going forwards this could weaken the Euro again, but with the Pound expected to fall in the coming weeks, a weak Euros doesn't necessarily mean higher GBP/EUR rates - indeed I predict by the end of next week we will be significantly below the €1.20 level.
Sterling could weaken
Most recent UK data, including gross domestic product numbers, has so far shown the economy is on the brink of a recession and the Bank of England is likely to step up its asset purchase programme next month to support the flagging economy.
Yesterdays data did ease some of those worries and gave the Pound a little boost, but did little to change market expectations of more quantitative easing by the Bank of England next month.
That is likely to undermine the British pound in the near term, especially against the dollar.
We’ll start down under today – Australia has Building permits, Commodity prices and Trade Balance figures – if good this could push GBP/AUD even lower than it already is. The UK releases its PPI data this morning also. In the Eurozone there are also inflation figures. In the USA there are some important releases – Jobless Claims, Labour costs and Nonfarm productivity.