Dovish Trichet comments weaken euro

The pound strengthened by 0.54 cents (0.46%) against the euro yesterday to close the day at 1.1704.

• In a volatile day’s trading yesterday, the pound first weakened then strengthened against the euro after Bank of England policymaker Tim Besley said it was too early to judge when the central bank would need to start withdrawing the massive stimulus it has delivered to the UK economy.
  
• However, another Bank of England policymaker was more optimistic yesterday. In his testimony to the UK Treasury Committee, David Miles said the most rapid declines in output were “behind us”. In addition, a credit conditions survey released by the central bank also buoyed sterling, after it showed that British lenders expect to make credit more readily available to households and businesses over the coming quarter.
  
• However, a PMI survey showing a modest deepening in the contraction of the UK’s construction industry capped sterling’s gains in late trading, after the index fell to 44.5 in June.
  
• The major announcement yesterday, however, was the European Central Bank’s interest rate decision, where they decided to keep rates on hold at 1.00%. ECB President Jean-Claude Trichet’s forecast that eurozone activity would likely remain weak for the rest of this year, stabilise in 2010 and grow thereafter weakened the single currency, as investors were hoping for a recovery sooner.
  
• In trading so far today, sterling has continued its rise against the single currency as investors continue to digest yesterday’s announcements.
  
• There are no major announcements due in the eurozone today, whilst in the UK Services PMI data is out at 13.30 BST.