Sterling strengthens against the euro

Sterling strengthened against the single currency yesterday as a strong performance by London’s blue chips fuelled investor appetite for the pound. Following Wednesday’s 2% gains, the FTSE 100 added another 1.3% yesterday as renewed hope the global economic recession may be easing increased. In early trading, the pound strengthened against the euro as worse-than-expected unemployment data released by the European Monetary Union revealed the rate had reached 8.9% in March, up 0.2% from the previous month. In addition, an improvement in UK consumer confidence to levels not seen since April 2008 also contributed to sterling’s gains against the single currency, as investor confidence that the country may soon come out of recession improved. The GfK/NOP survey showed a rise for the third consecutive month, up three points in April to -27. Sterling’s gains were also driven by strong performance on equity markets, with London rising strongly following steep losses earlier in the week over fears the swine flu outbreak could turn into a pandemic.

However, the pound’s gains yesterday morning were capped to some extent after data released by mortgage lender Nationwide revealed UK house prices fell 15% compared to this time last year. It showed the average house price dropped by 0.4% on the month, partly revising a surprise 0.9% increase in March. Despite this, the pound strengthened against the euro yesterday morning, aided by speculation about what the European Central Bank intends to do at their policy meeting next week to stimulate the eurozone economy. Following the US Fed’s decision to continue with their purchasing of long-term government debt as planned, citing some tentative signs of economic recovery and strong equity market performance as the basis for their decision, investors in the eurozone speculated that the ECB could well announce a similar strategy next week ,as it appears to be working in the US. Although quantitative easing – as the process is known – may well get the region out of recession in the long-term, in the short-term it would likely see appetite for the euro reduce, as a general feeling the ECB are “behind-the-curve” would surface. As a result, speculation over what policies the ECB intends to implement weighed on the euro yesterday, resulting in a weakening against the pound.

There are no announcements in the eurozone today because of Labour Day, whilst in the UK important Purchasing Manager Index Manufacturing data for April is due at 09.30 BST.