Pound Euro exchange rate drops as Pound Sterling gives up gains

The pound gave up some of its recent gains against the euro yesterday after the publication of the latest minutes of the last Monetary Policy Committee’s (MPC) rate-setting meeting at the Bank of England (BoE) showed that all nine members of the MPC were unanimous in the decision to keep the current monetary policy settings unchanged.

The minutes also stated that a "range of opinions" remain on the amount of existing slack in the UK economy suggesting that there are differences of opinion in how long they expect the second stage of the BoE’s 'forward guidance' to apply.

In short, the odds on a pre-2015 general election rise in UK interest rates just lengthened.

Meanwhile, the Office for National Statistics reported that the UK public sector net borrowing fell from £8.8 billion to £6.7 billion in March showing good progress is being made in the deficit reduction program implemented by the coalition government given that this time last year, the figure stood at £11.4 billion.

These figures left the deficit for all of the 2013/14 fiscal year at £108 billion, broadly in line with the most recent projections presented by the Office for Budget Responsibility (OBR).

Dr. Howard Archer, Chief European&UK economist at IHS Global Insight commented that "Highly pleasing and encouraging news for the Chancellor as a much improved performance in March allowed him to just meet the downwardly revised target for 2013/14 contained in last month’s budget. Despite the Chancellor achieving his downwardly revised fiscal target for 2013/14, it will clearly need sustained improvement in growth and in the public finances before any of the credit rating agencies seriously consider upgrading their sovereign credit rating for the UK.”

Meanwhile, credit ratings agency Standard & Poor’s declared a sharp warning to those seeking Scottish independence warning that a newly independent Scotland could end up with a banking system much like that of Iceland. Simply put, an independent Scotland would face a situation in which the assets of its banks where 10 times greater than the size of its entire economy so that the Scottish government would be unable to credibly support them should a new crisis arise.

The euro received a boost yesterday after Portugal successfully completed its first sale of long-term sovereign debt since its bailout in April 2011 with the Portuguese Treasury selling €750 million in 10-year Treasury bonds. Demand at the auction was high with a bid/cover ratio of 3.47 with an average yield of 3.5752%.

Portugal thus continues on track to exit its bailout program on 17 May.

Meanwhile the latest data release shows that business activity in the euro zone accelerated at its fastest pace in almost three years in April although the same data also show that dropping prices continue to fan the fears of a prolonged and damaging deflationary period in the euro zone.

Germany, the biggest euro zone economy continues to lead the upturn whilst the second biggest economy, France is still stabilising.

Markit Chief Economist Chris Williamson commenting on the latest data stated that it was “very encouraging news” and said it implied that companies believe that “recovery has legs and is looking increasingly sustainable”.

The US dollar remains subdued after the US Department of Commerce reported that new US home sales fell by 14.5% in March when compared with the previous month to reach an annualised rate of 384,000, well short of the 450,000 figure expected by analysts.

The data also showed that versus a year ago, sales were down by 13.3% and the supply of new homes available for sale increased to the equivalent of six months’ worth, up from five month’s worth reported in February.