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 falls.
For the currency markets, the news weakens the currency, and also increases the chance that interest rates will be cut in the Eurozone this week. Lower interest rates will cause investors to move funds to other higher yeilding currencies – at the moment this is the pound. So, there is a good case to beleive that as the week goes on the Euro will become weaker, the pound stronger and GBPEUR rates may continue to rise
So, the pound is enjoying a very strong position at the moment, with the best exchange rates for some time against a basket of major currencies. As outlined above, further USD and EUR weakness signal that rates may continue to rise, however we also have other economic data out today which is outlined below. So, if you do wish to gamble on rates continuing to rise, it is also worth planning for the fact that the pound may lose the recent gains and drop away, as is so often the case.
All it takes is some of the below data to be worse than expected, and the pound could fall. It is situations like this where Limit Orders allow you to continue aiming for a higher rate, while at the same time placing a Stop Loss order so if rates do tumble, you are protected and dont lose out completely. To discuss these contract types, click on the orange banner below to open a trading facility, and you can then have a tailored consultation for your particular requirements. It’s free, and there’s no obligation.
For the UK today at 09:30 we have Consumer Credit, Money Supply, Mortgage Approvals, and PMI construction. Later in the day we also have Unemployment figures for the EU. For the US we have home sales data and a consumer confidence release.
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