Pound weakens against the euro during British bank holiday

The pound weakened against the euro yesterday as some investors took advantage of the UK’s Bank holiday to push sterling lower. In a light day’s trading, speculation surrounding what the Bank of England intends to do at their next policy meeting this coming Thursday weighed on investors mind, with some suggesting there may be an extension of the central bank’s quantitative easing program to boost Britain’s ailing economy. Further contributing to investor’s concerns that the UK may not be well-placed to come out of recession was a damning report released by the European Commission, which said it expected the country’s economy to contract by 3.8% this year, a figure at odds with Chancellor Alistair Darling’s forecasts announced in the budget two weeks ago. The commission also added that, as output drops, it expected the UK’s unemployment to hit 10% by late 2010, equating to roughly 3 million Britons out of work by the end of next year. These downbeat predictions, clearly at odds with the UK government’s, put selling pressure on the pound throughout the day as investors opted to buy the euro instead, however the single currency’s gains were capped ahead of the region’s own central bank policy meeting later this week. Analysts fully expect the ECB to cut the euro zone’s interest rates by a further 25 basis points to 1% this Thursday, however question marks remain over whether it will introduce a quantitative easing program similar to that introduced by the US Fed. Last week, the Fed announced their intention to continue their quantitative easing program as planned, thus suggesting it is working and therefore putting pressure on the ECB to do the same later this week to get the euro zone out of recession. Nevertheless, the euro made ground against the pound yesterday, with potential Labour party infighting in the UK also contributing to its gains, despite several high-profile party figures pledging their support for UK Prime Minister Gordon Brown and his policies. It finished the day at 1.1197.

In early trading today, the pound has recovered all of its losses against the single currency as investors look to correct yesterday’s Bank holiday gains. There are no major announcements in the eurozone or UK today, however investors will be looking closely at both central banks to see if they give anything away ahead of their respective policy meetings on Thursday.