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Foreign Exchange Currency Outlook : GBP EUR Hits 13 Month Low as UK Manufacturing Activity Decreases

May 4, 2011 - Written by John Cameron

The Pound Euro exchange rate (GBP EUR) is 1.1123. The Pound Dollar exchange rate (GBP USD) is 1.6476.

The Pound experienced a day of severe losses against the other majors during yesterday’s session, following the release of April’s Purchasing Manager Index data for the UK manufacturing sector.

The PMI figure, a measure of manufacturing activity, showed a drop of 2.1 points from the March figure of 56.7. This represents its biggest drop since lat Autumn, causing analysts to raise doubts about the UK economy’s ability to sustain the growth in GDP of 0.5% that it registered in quarter one of 2011.

Comments made by Bank of England Governor Mervyn King to the European Parliament on Monday added to selling pressure on Sterling during yesterday’s session. King suggested that the size of the UK’s national debt would not allow policy-makers to consider an interest rate hike in the near-term.

Given King’s comments and the PMI figure, a tightening of monetary policy looks less likely than ever when the Bank of England announces its May interest rate decision on Thursday.

Elsewhere, Portuguese Caretaker Prime Minister Jose Socrates announced late yesterday that Portugal had agreed the terms of its EU-IMF bail-out. Socrates described the agreement as ‘good’ for Portugal, pointing out that the troubled Iberian state would be given more time than had previously been anticipated to cut its budget deficit. The erstwhile Portuguese leader went on to state that the €78bn bail-out would not necessitate any domestic wage cuts.

The market’s immediate reaction to Portugal’s bail-out has been supportive to the single currency, with the GBP EUR exchange rate breaking to a new 13 month low of 1.1103 overnight. However, the Euro would be susceptible to a technical retracement if this morning’s whole of Eurozone Retail Sales figure for March comes out at below zero.
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