Pound strengthens against the US dollar in quiet trade

In a quiet day’s trading because of the Bank holiday, the pound strengthened against the dollar yesterday, although investor wariness ahead of the Bank of England’s policy meeting on Thursday capped sterling’s gains. With London closed, some European investors took advantage of thin trading to force sterling lower initially, with low liquidity causing exaggerated movements on currency markets. Most analysts expect British interest rates to remain on hold at 0.5% when the central bank meets later this week, however the market was nervous that it may decide to extend its quantitative easing program beyond the current £75 billion. Elsewhere, scepticism by the European Commission over Alistair Darling’s budget growth figures also encouraged a flight away from the perceived high-risk pound early in the session, as the commission predicted the UK’s economy would grow by just 0.1% in 2010, instead of the 1.25% the Chancellor predicted. In addition, the commission also said that they forecast the British economy to shrink by 3.8% this year, a figure also at odds with the 3.5% contraction Mr. Darling outlined in his budget a couple of weeks ago. The commission’s predictions contributed to sterling’s falls against the dollar early yesterday, as investors became nervous that the UK still has a long way to go before its recession bottoms out, therefore buying into the perceived safe-haven of the greenback.

However, the pound strengthened against the dollar yesterday afternoon as better-than-expected manufacturing data released on Friday fanned demand for currencies perceived to be higher risk. The latest Purchasing Manager’s survey showed a slowing in the pace of contraction to 42.9 points, far ahead of the 40 points predicted and the 39.5 point reading for March. The results gave investors hope that some form of stabilisation may be returning to the battered manufacturing sector, as well as the economy as a whole. However, investor concern over what the Bank of England is to decide later this week, as well as renewed questions over Gordon Brown’s leadership capped the pound’s gains against the dollar yesterday, finishing the day at $1.5014, despite a raft of leading Labour figures publicly declaring he was the man to lead Britain out of this recession.

In early trading today, the pound has continued its rise against the dollar as investor appetite for risk continued. There are no major announcements due in the US or UK today, however all eyes will be on the Bank of England ahead of their meeting on Thursday, and also on the 19 major US banks to see if there are any further developments before the results of the US government’s stress tests are announced later this week.