Sterling vs. Euro 4th April 2011 – Sterling hits 5 month low

Euro4th April 2011 – Sterling vs. Euro – Sterling hits 5 Month Low

Sterling fell to a 5 month low vs. the Euro last week, on expectations that interest rates in Europe will rise faster than in the UK and talk of month-end demand from central banks. Sterling’s falls were exacerbated by sterling selling against the Australian dollar, related to insurance payments for flood damage in Queensland.

“There is a sense that the UK economy is going through a ropey phase and selling in sterling has been very steady since last week,” said Michael Derks, currency strategist at FXPro. “Further gains look likely while the market embraces the more positive aspects of the euro area periphery story, ECB tightening and softening UK data,” he said.

Following Thursday’s movement, the euro was broadly firmer as above-forecast euro zone inflation cemented the case for higher interest rates from the European Central Bank (ECB). Markets see the tightening cycle starting in April.

Current Euro Sterling Graph – 4th April 2011

Euro Sterling Exchange Rate Graph 4th April 2011

Manufacturing growth slowed more than expected in March but companies still ramped up prices at a record rate to cover rising costs, a survey showed on Friday. The Markit/CIPS manufacturing PMI headline index fell to a five-month low of 57.1 in March from a downwardly revised 60.9 in February. Analysts had expected only a slight dip to 60.6.

On a brighter note for sterling, Housing prices increased and the manufacturing survey also showed that companies’ raw materials costs had continued to rise in March, albeit at a slightly slower rate than in February. And companies continued to take on new staff, though not at February’s record pace.

Rising job creation, a surprise rise in house prices and further growth in the manufacturing sector are encouraging signs. However, the economic outlook is still uncertain and the slowdown in the pace of expansion in the sector will not ease the dilemma facing Bank of England policymakers over how to tackle persistently above-target inflation, without harming economic recovery.

The pound fell off the back of the figures, but analysts noted that the manufacturing sector was still on course to make a strong positive contribution to first-quarter GDP growth, which may work to ease concerns of the UK slipping back into recession.

Money markets have pushed back expectations for the first rise in interest rates from a record low 0.5 percent to August from May, largely as a result of weak news on consumer activity. “The Monetary Policy Committee’s balancing act between growth and inflation has perhaps become even more precarious,” said Markit economist Rob Dobson. Markit said the slowdown in demand was most pronounced in the consumer goods sector, which was virtually stagnant, and indicated a fall in domestic orders for such goods.

Rising inflation, muted wage growth and the prospect of government spending cuts have hit consumer morale and dented retail sales, spelling bad news for an economy which has historically been heavily reliant on household spending.

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