The pound strengthened against the euro by 0.8 cents (0.7%) yesterday, finishing the day at 1.1430.
• In early trading, the pound strengthened against the single currency as pessimism surrounding the UK economy and financial sector eased.
• Adding to the euro’s early dip was the release of worse-than-expected German producer price data, which showed a 1.4% fall in April from the previous month, the sixth monthly decline.
• The release of Bank of England minutes from their last policy meeting, in which they decided to extend their asset purchase program by a further £50 billion, was greeted with relief on the markets mid-morning after it produced no big surprises. The MPC voted unanimously to expand its quantitative easing although, interestingly, they did discuss the possibility of a £75 billion extension.
• However, by lunch the euro had clawed back all of its early losses against the pound as traders booked profits from the previous day’s gains.
• Comments made by Portuguese Finance Minister Fernando Teixeira dos Santos sent the single currency into positive territory after he said a strong euro had not been a concern among European finance ministers. A pull-back in continental equities from session lows also helped to increase risk demand in the market, with the euro again benefitting as a result.
• A downbeat report released by the International Monetary Fund yesterday afternoon further weighed on the pound after it said any recovery in the British economy is likely to be subdued. It also warned that the UK’s high levels of borrowing and the fragility of its financial sector make it susceptible to potential shocks.
• Nevertheless, in late trading the pound eventually clawed back into positive territory against the single currency, as investors remained wary that the eurozone may still have some way to go before its recession bottoms out, with last Friday’s downbeat GDP figures still weighing on many minds.
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