Sterling and euro boosted following better than expected UK and eurozone manufacturing figures

Tom Tong04/Jun/2013Currency Updates

GBP

Signs of a UK recovery once again surfaced as more data released yesterday added more wind to the sales. The UK purchasing managers index on manufacturing rose to 51.3 which was well above the forecasts 50.2 level and a 14 month high. In addition to this April’s figure that had suggested no improvement was revised upwards to 50.2. Given that the UK’s largest demand comes from the eurozone, this improvement come from relatively weak position. In addition to this the British Retail Consortium revealed that like-for-like sales rose 1.8% despite the poor weather. This information was in stark contrast to the US factory data released from the US pushing sterling to the highest level since May 16th.

However, it is not all positive news for the UK as banks still refrain from passing on the cheap loans offered by the BOE. In the past quarter lenders have withdrawn £2.6bn from the bank whilst at the same time net lending has dropped £300m. The Funding for Lending Scheme (FLS) setup last summer hoped to entice banks to allow UK businesses and households access to more liquidity to kick start growth in the economy. Paul Fisher, one of the BOE’s directors stated that flat lending was ‘broadly expected at this stage’ but that ‘The plans of the FLS participants suggest that net volumes will pick up gradually through the remainder of 2013’.

The only data out today for the UK is construction PMI. Along with manufacturing this sector remains a challenge to the UK economy. All eyes will be focused on this information to see if it pull itself out of contraction.

EUR

The eurozone’s largest economies saw their manufacturing downturn ease in May, as Markits purchasing managers index PMI ticked up in Germany, France and Italy. Despite continuing to contract, eurozone factory activity hit a 15-month high in May, making it unlikely that the European Central Bank (ECB) will need to take further action in June. The greatest signs were in Greece and Spain, two of the most embattled economies reaching a 23 month and two and a half year peaks respectively.

These stronger than expected eurozone PMI’s added with Eurostat figures published on Friday showing improved inflation and unemployment figures coupled with poor US jobs and GDP data has lead to the euro recovering some of the ground it has lost previously against its major counterparts, particularly the US dollar.

In other news from the eurozone German Chancellor Merkel met with French president François Hollande last week to discuss strategies on combating youth unemployment. Merkel had indicated the need to step up economic cooperation; “Coordination on European economic policies is too weak. It must be strengthened,” she said. However, she stated that this is not the same as giving Brussels more power. the latter comment coming after she rejected a plan that would grant more power to the European Commission and warned European Union (EU) governments to work more closely in order to establish economic policies.

This cooperation can be seen clearly as Reuters accessed a draft paper from the German ministry which reported a planned bilateral programme where Germany plans to make available one billion euros for Spanish small and medium sized businesses. German state development bank KFW would provide the loans and different financial instruments in an aim to boost employment and the expansion and growth of Spanish companies.

The ECBs Mario Draghi was speaking in Beijing yesterday were he stated that the eurozone was returning to normal mainly thanks to theri implemented plan of buying bonds of trouble governments in outright monetary transactions (OMT’s) on the condition they also implement tough economic reforms. ” The establishment of OMT has been benefical to everybody sovereigns, corporations, banks as well as individuals, while it has also benifited both perihery and core countries” he commented.

Today is a quiet day with no top tier data to be disseminated to the public, investors will be waiting to see the GDP figures QoQ and Retail sales MoM as well as other top tier data later in the week from other central banks to see where the Euro will move in the coming days and weeks.

USD

The dollar fell below the 100 mark in the yen yesterday after falling past its level for the first time in almost a month, investors are still weighing up whether they think the recovery is strong enough for the Fed to scale back stimulus.

The dollar index recovered to 82.837 after sliding as much as 1 percent to 82.428 on Monday following news the US factory activity fell to 49.0. May’s data was the first time the index has pointed backwards since July 2009.

The market’s next focus is a US jobs report out on Friday, which could support the prospect of the Fed winding down its asset-buying programme early.

There is a raft of data coming out of the US this afternoon most notably at 12.30 Trade Balance expected to come in weaker than previously expected.

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Written by Tom Tong

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