Sterling Squeezed

Claire Hogarth23/Jun/2011Currency Updates


Sterling was weak across the board after Bank of England’s policy makers retained interest rates at a record low 0.5 in June, again by a split vote, the minutes of the meeting showed Wednesday. Members have started to see the rising need for more quantitative easing, given the possibility of longer than expected weakness of demand growth as well as fiscal challenges in the euro area periphery. The 7-2 split for keeping interest rates down from 6-3 last month was mainly due to the hawkish Andrew Sentance stepping down last month and being replaced by new policymaker Ben Broadbent.


The Dollar was stronger on Wednesday, after the Federal Reserve gave no indication it will embark on a third round of quantitative easing in support of the sputtering economy. On the flip side, minutes from the Bank of England’s latest meeting suggested U.K. policy makers are pondering further asset purchases, driving the dollar to a new monthly high versus the sterling.
Still, with consumers pinched by rising prices and the jobs market still weak, the Federal admitted that earlier projections of U.S. economic growth were overly optimistic. The Fed downwardly revised its 2011 outlook to between 2.7 percent and 2.9 percent annual growth. The unemployment rate will still be around 8.6 percent to 8.9 percent at year’s end, according to the Fed.


The euro held its recent gains versus the dollar on Wednesday, after the Greek government last night survived a confidence vote that clears the way for emergency bailout funds. They must however now adopt further cost cutting measures to avoid a sovereign default. Greece’s neighbours and the IMF will not come through with a 12 billion euro tranche of bailout money unless Athens takes steps to get its fiscal house in order. As Greece would default next month without the emergency loan, parliament is expected to pass reforms despite violent protests.

Meanwhile, new orders received by Eurozone industrial sector increased in April, but the rebound from March’s decline was weaker than expected, latest figures from Eurostat showed Wednesday. Orders grew 0.7 percent month-on-month in April, after falling 1.5 percent in March.

This morning French PMI data disappointed as the recovery in France’s private sector slowed much more sharply than expected in June as global economic uncertainty weighed on demand, PMI fell to 55.4 in June from 60.3 in May, reflecting the slowest pace of growth since October. In services, the flash headline index slumped to 56.7 from 62.5 in May, falling to the lowest level in six months. German Manufacturing PMI increased 54.9 points in June, somewhat less than the 57.7 point growth registered the previous month. The reading was below the forecast of 57.0. German Services PMI increased 58.3 points in June, in comparison with 56.1 in May, exceeding expectations of 55.7 point growth.


Written by Claire Hogarth

Marketing Executive at Ebury. English Literature graduate from the University of York and a motivated professional.