The Pound further declined against the Euro yesterday, trading down to 1.1209, after manufacturing and services indexes slumped by more than expected and UK mortgage approvals fell to the lowest level in four months.
The second quarter data raises more concern that the economy will manage to gain momentum this year, not helped by inflation accelerating at the fastest pace in two years.
There is widespread speculation that the ECB will announce on Thursday their desire to raise interest rates in the Euro-zone, extending the yield advantage by another 25 basis points.
Currency exchange against the Euro wasn’t the only area the Pound struggled in yesterday. It also encountered strong resistance in the region of 1.6450 against the US Dollar and dipped lower to test support at 1.6350.
The International Monetary Fund (IMF) broadly endorsed the government’s deficit-reduction plan, saying the current economic weakness is “temporary.” It also said that the current increase in inflation was a temporary measure and that it’s appropriate for the Bank of England to maintain the “current scale of monetary stimulus.”
The Chancellor of the Exchequer George Osborne said yesterday that he would keep to his austerity program, despite calls from a number of leading economists that the cuts are too damaging to the economy and will actually increase the deficit by reducing tax income and increasing welfare costs.
The report from the IMF will do little to support Sterling because it vindicates the Bank of England’s decision to keep interest rates unchanged at a record low of 0.5% with the MPC unlikley to change UK borrowing costs this Thursday.
The IMF also lowered its 2011 forecast for UK economic growth to 1.5% from 1.7% in its World Economic Outlook in April. The Pound was down 0.3% against the Dollar following the report and further downside movement appears likely in the short-term.
On a slight positive, a report from the Engineering Employers Federation showed that UK factory production strengthened in quarter two, as companies benefit from a weak Pound and a growth in export orders.
The Pound continued to weaken against the Euro through the Asian trading session overnight, after a report from the British Retail Consortium reported that retail sales unexpectedly declined in May.
The UK currency also lost ground versus the majority of the 16 most actively traded currencies, as sales fell 2.1% from a year earlier.
The Euro rose to a one month high against the US Dollar yesterday. This was on the back of strong speculation that the European Central Bank is preparing to raise interest rates in July and reports that a government spokesman in Germany said that the chancellor Angela Merkel told US president Barack Obama that the Euro-zone will overcome the sovereign debt crisis.
There were no major US data released yesterday but the Dollar was undermined by concerns over the economy and the possibility of further quantitative easing from the Federal Reserve.
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