The pound reached a 7 month high against the euro overnight as uncertainty about whether Greece will be deemed to have done enough to qualify for the next tranche of emergency aid under the bailouts agreed in 2010 sent the euro sharply lower against all the major currencies on Monday.
Escalating concerns over a possible Greek default overshadowed better than expected US economic data and sent investors towards the so called ‘safe haven’ currencies such as the US dollar, Japanese Yen and Swiss Franc.
The markets were rattled on the announcement that Europe’s finance ministers have delayed a decision on giving Greece the next slice of its bailout. The move follows Greece’s announcement that it would not meet targets for cutting its deficit this year or next.
The latest wave of risk aversion sent the pound up against the majority of the 16 most actively traded currencies despite the latest batch of data highlighting the fragile nature of the UK economy. The Markit/CIPS Purchasing Managers Index for the UK manufacturing sector showed the sector returned to growth in September, but the general trend over the last three months continues to be notably weak. The survey asks 600 industrial companies various questions related to the health of their business, including the state of their order book and the price they are paying for raw materials.
The index’s author and senior economist at Markit, Rob Dobson stated “The sector is… being buffeted by events in the global marketplace. New export orders fell at the sharpest pace since May 2009, as growth slowdowns in the US, European and Asian markets counter-balanced the ongoing weakness of sterling. This is increasing manufacturers’ reliance on a fragile domestic market that itself is being impacted by subdued household and business confidence and ongoing austerity measures. The modest return to growth of UK manufacturing output in September is a positive, but it is hard to escape the fact that the sector’s performance has weakened substantially since the opening quarter’s growth surge.”
Economists at Barclays Capital commenting that, “The improvement in the September headline measure, although broadly based, is still consistent with only a small expansion in the sector. (..) Although the September figure is not as bad as expected, the data for Q3 as a whole are still consistent with an abrupt stalling in manufacturing activity.”
Meanwhile, property researcher Hometrack said today that UK house prices fell for a fifth consecutive month in September with the average cost of a home slipping 0.1% from August and by another 3.5% from a year ago.
“Events in the euro zone, together with pressures on the domestic economy and household incomes are clearly taking their toll on consumer confidence,” Richard Donnell, Hometrack’s director of research, said in a statement. “(We see) a likely acceleration in the level of monthly price falls over the final quarter,” he added.
The weakness in the UK economy has increased speculation that the Bank of England (BoE) will introduce another round of quantitative easing (QE) measures to stimulate the UK economy away from a ‘double-dip’ recession. This would not be great news for the pound as QE has been shown in the past to devalue the currency.
