The pound continues to dip against the euro

The pound, despite some decent economic data out of the UK and some poor data from the euro zone continues to ebb away from the multi-month highs seen recently.

Twice in the last week, the Bank of England (BoE) have warned against the dangers of the pound appreciating too much in value in case this harms the UK export drive and derails the UK economic recovery. On Wednesday, in a speech in New York, BoE Governor Mark Carnet specifically warned on this very subject and last Friday, BoE Chief Economist Spencer Dale said that the central bank will not raise interest rates until the UK has experienced an extended period of growth; that the BoE needs to see higher real incomes and lower unemployment before increasing the benchmark rate from its historic low of 0.5% which was set back in March 2009.

In a speech to the Confederation of British Industry (CBI), Dale said “But abstracting from the details of these thresholds and knockouts, our message to you – the businessmen and women driving this recovery – is clear. You can plan for the future in the knowledge that the MPC intends to keep interest rates low until we have seen a prolonged period of strong growth, unemployment is significantly lower, real incomes are higher.”

Dale also warned of the risks to the UK’s recovery including the housing market, saying it had a "a tendency to turn from lukewarm to scalding hot in a matter of a few economic seconds".

In the euro zone, a report from survey compiler Markit out yesterday showed an overall improvement in both the euro zone manufacturing and services sector activity but also pointed to weak growth in France offset by better than expected readings for Italy and Spain alongside solid indications for Germany.

Chris Williamson, Chief Economist at Markit said "There is little here to suggest that euro area policymakers need to increase their stimulus, but on the other hand the sluggish nature of the upturn adds to the sense that policy will remain ultra-accommodative for quite some time."

In the US, the US Federal Reserve released data showed that US industrial production grew by 1.1% month-on-month pace in November, well ahead of the 0.8% rate expected by economists.

By contrast, activity in the Chinese manufacturing sector registered an unexpected drop to a three-month low in December according to the initial data published by HSBC yesterday with the HSBC purchasing managers' index (PMI) for manufacturing falling to 50.5 from the prior reading of 50.8.

HSBC China Chief Economist Hongbin Qu said that despite the marginal slowdown in the PMI, it still remains above the average reading for the third quarter. This “implies that the recovering trend of the manufacturing sector starting from July still holds up".