The euro made its first substantial gains for nearly a week yesterday and the US dollar suffered as a string of upbeat global economic data swung the markets back towards risk appetite.
Manufacturing figures for November from China triggered a bullish mood early on with activity up for the fourth consecutive month.
UK manufacturing also impressed the markets with activity at a 16 year high last month, easily beating analysts’ expectations. The UK government has stressed the need for exports to play a greater role in future economic growth, particularly in light of its austerity measures that are expected to hit consumer spending in 2011.
Manufacturing currently accounts for about 13% of the UK’s total economic output. Analysts were particularly upbeat following the survey.
“It’s a very strong outcome. It may well be that we are beginning to see a bigger rise in exports which could lead to a rebalancing of the economy. It’s hugely encouraging” said Philip Shaw at Investec.
The positive manufacturing data lifted the pound against the dollar but the pound lost ground against the firmer euro.
The euro was lifted following comments from European Central Bank (ECB) President Jean-Claude Trichet and the potential of the ECB purchasing bonds from debt laden European countries. This eased concerns about euro zone contagion.
In a further boost to the euro, Portugal sold €500 million of 12 month bonds at a yield of 5.28%. While the yield is up from November’s 4.81% traders said demand was better than expected.
Better than expected US job figures also encouraged risk appetite. Payrolls processing firm ADP reported 93,000 private sector jobs were added in November, the biggest gain in three years. Goldman Sachs raised its forecast for US growth next year to 2.7% from 1.9% ahead of key jobs figures out Friday.
Speculation is now rife that the European Central Bank could potentially take strong steps at its monthly rate meeting later on today to ease concerns about the debt crisis unfolding in Europe.
Today’s Spanish 3 year bond auction of around €2 billion will be closely watched to see if yesterday was a mere blip in the decline of the euro or a key reversal in the euro’s fortunes.
Meanwhile, analysts at Citigroup continue to fear the worst, believing Portugal to be “insolvent” and in need of an emergency loan soon.
In the short term, the pound may well have peaked against the euro and if this coincides with risk appetite in the markets, we could then see the pound lose ground across the board.
