Sterling continues march over weaker euro

The pound strengthened against the euro yesterday as continued strength on London equity markets improved investor sentiment that the UK may tentatively be coming out of recession. The FTSE 100 finished the day up 59.55 points yesterday at 4,396.49. In early trading, the euro strengthened slightly against the pound after better-than-expected Purchasing Managers’ index data released in the eurozone bolstered investor hopes that an economic recovery in the region may not be too far off. The index unexpectedly rose to 43.8 in April up from 43.1 the previous month. However, the single currency’s gains against the pound were capped to some extent following the release of weaker-than-expected Retail Sales data in the region. March’s Year-on-Year sales figures fell by 4.2%, down from -2.6% in February, whilst the Month-on-Month figure came in at -0.6%, markedly lower than the 0.1% increase analysts had predicted.

The euro’s gains were also capped yesterday by increased market speculation ahead of the European Central Bank and Bank of England’s interest rate decisions, announced later today. Most analysts are now agreed the ECB will cut its key rate by 25 basis points to 1%, however whether it will also adopt a quantitative easing program like the US Fed remains to be seen. This uncertainty weighed on the euro’s earlier gains against sterling, although the pound was unable to go into positive territory against the single currency because of investor speculation surrounding its own central bank, the Bank of England, who may announce an extension of its own quantitative easing program beyond the current £75 billion later today. In addition, better-than-expected data released by CIPS/Markit showed the UK service sector contracted in April at its slowest rate in eight months. April’s reading of 48.7 was the highest since August 2008 and was well ahead of the 46 analysts had predicted. Despite this, the euro went into lunch slightly up against the pound, with improved risk sentiment in the eurozone spurring its gains.

However, in the afternoon continued strength in London equities lifted the pound into positive territory against the euro, with retailers Next and the Co-operative Group both gaining ground after posting solid profits. The pound’s gains were also aided by increased investor wariness ahead of the ECB’s interest rate announcement later today, with some speculating that the central bank may be “behind-the-curve” in terms of stimulating the eurozone out of recession should they only now announce quantitative easing. As a result, investors sold the single currency in late trading yesterday, looking instead to what some perceive to be an undervalued pound. As a result, sterling finished the day up at 1.1348.

In early trading today the pound has continued its rise against the euro, following news that Barclays have posted a £1.37bn pre-tax profit for the first three months of 2009, further improving investor confidence in the UK’s chances of recovery. There are some very important announcements out on both sides of the English Channel today. In the eurozone, German Year-on-Year and Month-on-Month Factory Orders for March are out at 11.00 BST, whilst at 12.45 BST the ECB will announce its interest rate decision. Finally, ECB President Jean-Claude Trichet is due to give a speech at 13.30 BST. In the UK, the Bank of England’s interest rate decision is due at 12.00 BST.