Fears surface for US economy as manufacturing figures disappoint as Finland and Holland oppose latest EU rescue plans

Tom Tong03/Jul/2012Currency Updates

GBP

Yesterday saw the pound have a less than successful day versus the dollar. Sterling fell against the dollar as a survey showed UK manufacturing activity contracted for a second month running in June and tracking a drop in the euro as optimism following last weeks European summit agreement slowed down significantly. This unappealing data coming from the UK backed the market’s view that the BOE is likely to opt for further quantitative easing at a policy meeting later this week in order to stimulate a sluggish economy. There is expected to be a top up of the estimated 325 billion pounds of cash it has already pumped into markets with another 50 billion when it meets on Thursday as falling inflation gives it more scope to support a battered economy. Despite the weak PMI data coming from the UK on Monday, sterling managed to strengthen against the euro as optimism following last week’s eurozone summit agreement waned, exemplified by Finland objecting to using the eurozone’s rescue fund to buy government bonds in the open market. Finland said it would block the eurozone’s permanent bailout fund from buying government bonds. The Netherlands also indicated opposition.

EUR

The euro struggled on Tuesday after poor data raised expectations for more action from the ECB. Investor hopes for the EU’s plan to support debt-laden countries turned to scepticism. The eurozone jobless rate rose to a record high in May, and a measure of factory activity held steady at its lowest level since June 2009, lending credence to those who believe the ECB will cut interest rates at its policy meeting on Thursday. The single currency faced additional pressure from news yesterday that Finland and The Netherlands opposed a plan for the eurozone’s permanent bailout fund to buy government bonds in the secondary market.

USD

The dollar was largely unchanged yesterday despite fears for the broader economy as manufacturing orders dropped for the first time in three years. The Institute of Supply Management’s PMI figures dropped to 49.7 in June from 53.5 in May, a much greater drop than consensus expectations. Despite this fall in manufacturing data the S&P saw a late session rally, as did other equities, as traders were boosted by the increased likelihood of the Fed turning to QE to stimulate the economy in the face of this data. The only data release of note in the US today is the factory orders number which, if negative, will further stoke the call for new stimulus measures from the Fed.

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Written by Tom Tong

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