Sterling drops to 13-month low against euro on poor PMI data

Tom Tong04/May/2011Currency Updates

GBP

Sterling hit a 13 month low against the euro and lost over one percent against the dollar on Tuesday, as disappointing PMI data dampened growth prospects and ultimately prompted investors to push back forecasts of any near term interest rate rise. The pound was dealt a further blow on Tuesday as the CBI distributive trade survey added to signs of a grim outlook for UK economic recovery. British retail sales showed solid annual growth in April, but stores planned to cut orders with suppliers in anticipation of a weak May.

The pound is currently suffering from the significant contrast between UK and Eurozone monetary policy expectations. The interest rate futures market has now shown investors are not fully pricing in a 25 basis point raise rise in the UK until November or December at the earliest, which could lead to further sharp selling of the pound. The Bank of England next meet on Thursday to set interest rates, however, with the likelihood of further weak PMI services data released the same day its looks certain to remain unchanged.

EUR

A great day for the euro saw it hit 1- month and near 17-month highs against the pound and dollar respectively as divergent interest rate outlooks between the countries continue to govern the markets. The ECB have been quick to act in tackling rising inflation through interest rate hikes, a measure which in the near term now looks increasingly unlikely from either the Bank of England or Federal Reserve.

USD

The dollar incurred losses against a basket of currencies during Tuesday trading, notably reaching record lows against the Swiss franc and falling to near 17-month lows against the euro as mounting expectations that US interest rates will remain unchanged indefinitely halted demand for the currency. The only positive for the dollar was the gain made against the pound which followed on from the negative UK manufacturing data, which has put paid to any short term interest rate change in the UK.

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Written by Tom Tong

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