The pound plunged to a 14 month low against the euro and fell heavily against all 16 of the most actively traded currencies as data showing a marked slowdown in the UK’s manufacturing sector pushed traders into lengthening the odds on a UK interest rate rise.
The UK’s manufacturing sector grew at its weakest pace for seven months in April. Manufacturing has been one of the healthiest sectors in the economy since the UK emerged from recession at the end of 2009. Although output prices fell in April, they remained close to March’s peak, indicating that inflation is still high.
This morning, the Nationwide reported that UK house prices fell by 0.2% in April compared with March but values are showing little momentum in either direction. The building society said property values had fallen in three of the last six months and risen in three, because prices were “static”.
The Euro has been strengthening after recent data showed higher than expected inflation in both Germany, the biggest euro zone economy and in the euro zone as a whole indicating the European Central Bank (ECB) may look at increasing euro zone interest rates again in the summer.
This morning, Portugal’s caretaker prime minister Jose Socrates announced that he has reached agreement on a bail-out from the EU and the International Monetary Fund. Mr Socrates said the three-year loan was a “good agreement that defends Portugal”. His office says Portugal will be asking for financial assistance worth €78 billion euro’s.
Officials from the European Commission, European Central Bank and IMF have been working on a deal for three weeks.
In a further sign that emerging economies are actively dealing with a whole different set of problems than their counterparts in the US, UK and euro zone periphery face, both the Russian central bank and its Indian counterpart have aggressively increased interest rates in the last few days to counteract inflationary pressures.
Australia held interest rates overnight unchanged at 4.75% but indicated that it is carefully monitoring inflationary pressures in its fast growing economy.
Commentary by Tony Redondo
“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”
