Pound makes gains against the euro

The pound strengthened against the euro yesterday, as investor wariness over what the ECB intends to do at their next policy meeting on May 7th reduced appetite for the single currency. Early in the day the pound weakened against the euro, despite news over the weekend that Spain’s unemployment rate had reached 17.4% at the end of March, double what it was this time last year. Investors appeared more wary of the dire state of the UK’s public finances early on, particularly as it was revealed on Friday that the British economy shrank by a worse-than-expected 1.9% for the first three months of 2009. As a result, increased investor scepticism over UK Chancellor Alistair Darling’s optimistic growth forecasts announced in the budget last week, as well as the country’s ability to service its ballooning public debt, led many to dump sterling in early trading and look elsewhere. This initial strengthening of the single currency came despite worse-than-expected figures released by Destatis in Germany that Year-on-Year Import Price Index for March had fallen by 7.1%. Soon after lunch, however, sterling rallied against the euro, despite news of a drop in the number of mortgages approved in March. Figures released by the British Bankers’ Association showed the number of mortgages approved by the UK’s major banks fell to 26,097 in March, 47% down from the same time last year. The drop was the first in four months, fuelling fears among investors that a UK housing market recovery may still be some way off.

Nevertheless, despite this news sterling strengthened against the euro in afternoon trading as investors looked warily ahead to the European Central Bank’s next monetary policy meeting on May 7th. It now appears increasingly likely that the bank will cut interest rates by a further 25 basis points to 1%, but what is less clear is whether the central bank intends to copy the Fed and Bank of England by implementing a quantitative easing program to help boost the recession-hit eurozone economy. The euro finished the day down at 1.1231 from 1.1082.

In early trading today, the pound has weakened against the euro as fears over the extent of the swine flu outbreak continue. Yesterday, global equity markets were hit as investors dumped travel stocks on the basis that a possible pandemic would reduce global travel. The knock-on effect of a widespread outbreak could have devastating effects on the global economy, with some economists estimating that the world could lose $3 trillion in lost output. With the UK economy so dependent on banking and the financial services, this could have devastating effects on the country’s economic recovery, and therefore investors may start to look beyond sterling in the coming days to reduce risk. There are no major announcements in the UK or eurozone today, however many will be following news of the swine flu outbreak to see if it gets any worse.