Sterling gains against euro, dollar; Portugal downgraded to ‘junk’

Tom Tong06/Jul/2011Currency Updates

GBP

Sterling rallied on Tuesday against the dollar and euro after better than expected UK services PMI.  The surprisingly positive services data saw the PMI index for June rise to 53.9 off of a 3 month low in May and well above the anticipated 53.5 decline. This improvement heralded a bout of short covering among investors which saw the pound jump by around 1 cent against the dollar. The outlook for the UK economy remains gloomy and therefore many analysts believe further sterling gains will be capped. It is now extremely unlikely that the Bank of England will raise interest rates any time soon and we could see further losses for the pound if speculation persists around further quantitative easing. Today is light in terms of economic data from the UK, with the markets looking towards a busy Thursday which will show key manufacturing and industrial production figures combined with the Bank of England’s interest rate decision.

EUR

The euro took a hit yesterday as renewed concerns over the Greek Bailout and Portuguese fiscal problems dominated sentiment towards the single currency. This led to the single currency relinquishing any gains from last weeks improved sentiment from the Greek bailout being agreed and Trichet’s ‘strong vigilance’ language hinting towards an interest rate rise this month. As a result of worries over fiscal viability in Portugal, Moody’s cut Portugal’s rating to “junk” status. Moody’s cited the Greek bailout as a risk, implying that policy makers would be reluctant to shift additional private debts to the public balance sheet. As a result the euro dipped by 0.8% against the dollar on the day, and by a percent against sterling, which was boosted by slightly better than expected UK PMI data. The main euro focus will be on the final GDP reading (quarterly) due out at 10:00. This is expected to be at 0.8%.This will be followed at 11:00 by German factory orders which is expected to show a monthly decline of -0.5%.

USD

It has been a short week for the USA thanks to Independence Day on Monday.

Now that the situation in Greece has calmed down for the time being at least, attention is focused towards economic matters.  The market is now keenly awaiting key US economic data scheduled for release at the end of this week.  This follows last Friday’s US ISM data which posted 55.3 vs 52.0 expected.  The report on US manufacturing suggested that the US economy may be rebounding following sluggish performance due to a hike in energy prices.  We await the latest release of US Non-farm payrolls this Friday.

Additionally, US President Obama has called Democratic and Republican lawmakers to the White House on Thursday for talks on raising the country’s debt ceiling as a deadline for action looms. However unlikely it may be, the government risks defaulting on its debt if Congress does not enact more borrowing authority by 02 August.

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Written by Tom Tong

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