The pound continued its strong gains in trading yesterday, and hit a 7 month high against the US Dollar and also new highs against the Euro.
Rising share prices prompted investors to seek perceived riskier assets such as the pound, and some analysts now believe that the UK economy could emerge from a global recession sooner than other major economies.
Other data yesterday showed Britain’s manufacturing sector contracted at its slowest pace in a year in May as the pace of decline in new orders, output and employment eased.”Today’s PMI reading adds to the growing body of evidence that the pace of contraction in the UK is slowing, even raising the possibility that the UK may be one of the first large economies to emerge from the crisis,” said analysts at UBS. This also helped the pound continue to rise
The dollar has fallen on signs the global economy is improving. This makes currency traders more confident to switch to higher-yielding currencies (like the pound).
This is the case not only for the pound, but also the euro, as UK and eurozone interest rates remain higher than in the US. While US interest rates are currently between 0% and 0.25%, UK rates are at 0.5%, and the eurozone level is 1%. This selling of US Dollar has helped weaken the currency, and combined with the current strength of the pound, has pushed rates to the highest since November last year. Right now rates are at 1.6397.
Prices in the eurozone stopped rising in May with the annual inflation rate at 0% , igniting concern that prices will fall in the months ahead.
This is the lowest inflation rate recorded since 1997. Inflation stood at 0.6% in April, after hitting 4% when energy prices hit record highs. Many analysts now expect deflation to grip the 16-nation zone this summer.
“There seems little doubt that the eurozone will see deflation in June and that it will persist over the next few months at least,” said Howard Archer at IHS Global Insight.
Deflation is considered damaging to an economy as consumers tend to delay making purchases until prices fall further. Without consumer spending to stimulate growth, economic output fall