The pound reached a 2 ½ month high against the US dollar as the commodity and equity markets took on a more bullish tone as risk appetite made a comeback.
The catalyst was better than expected manufacturing data. In the UK, the manufacturing purchasing managers’ index (PMI) came in at 62 in January, well ahead of expectations and the highest reading since the survey began in 1992. The data will lift hopes of economic expansion in the first quarter of 2011 following the surprise contraction in the last quarter of 2010.
It will also add to the dilemma facing the Bank of England’s Monetary Policy Committee (MPC) as they contemplate whether to raise interest rates. High inflation appeared to be pointing towards a rise in interest rates, and led to two MPC members voting for a rise in rates at the last meeting, but the surprise fall in overall economic activity in the fourth quarter reported last week suggested rates should stay at 0.5% to encourage economic growth.
Much will now rest on activity in the services sector, which is much larger than manufacturing. Data from the sector is due out tomorrow with numbers from the smaller construction sector due out later on today.
However, the Nationwide reported that the downward drift in house prices continued in January, with the average price of a home declining by 0.1% to £161,602. House prices have been declining since about the middle of last year having rallied from significant falls during the global economic crisis.
The “data does little to alter the picture of a sluggish market that has been evident since the summer,” said Nationwide chief economist Robert Gardner.
The US dollar has been on the back foot in the last 36 hours as the situation in Egypt appears to be being relatively contained for now. Even the best manufacturing ISM data since May 2004 wasn’t enough to lift the fortunes of the dollars which is suffering on the back of the Fed’s ultra loose monetary policy and a rise in risk appetite amongst investors.
The euro also received a boost from similarly positive PMI data, as well as speculation that at tomorrow’s European Central bank (ECB) meeting, ECB President Trichet may indicate an early rise in euro zone interest rates to combat rising price pressures in the euro zone.
Commentary by Tony Redondo
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