The pound holds on to its recent gains

The pound remains within a percent of the best rates against the euro for 15 months and very close to a 5 year high against the dollar after the latest batch of economic data from the UK showed that the economic recovery seems to be both broad based and solid.

Firstly Markit reported that UK Manufacturing PMI hit a three year high in April with the production gauge at an eight month high.

Rob Dobson, Senior Economist at Markit pointed out that today’s data means that on its current track manufacturing output growth in the second quarter may even breach 1.5% and 10,000 new jobs being created in the sector each month.

Jonathan Lowes, Chief European economist at Capital Economics commented that the data is indeed encouraging as regards the prospects for a rebalancing of the UK economy.

Meanwhile the Bank of England reported that lending to individuals increased by 0.2% in April or £2.9 billion to reach £1.44 trillion, well ahead of the average monthly rise over the previous six months of £1.9 billion although the number of mortgages approved for home lending decreased from 69,592 in March to 67,135 in April.

For its part, the Nationwide reported that UK house prices increased by 1.2% in April to reach £183,577. This leaves prices 10.9% higher than a year ago, the first double-digit gain in four years.

Of interest, data shows that the upturn in new construction continues to lag behind demand with the number of new homes being built in England continues to be about 40% below pre-crisis levels, a pace which was already insufficient to meet the rate of household formation according to the Nationwide.

The Nationwide data also shows that while prices in London were around 20% above their pre-crisis levels, in the UK as a whole they are still around 2% lower.

Commenting on the data, Dr. Howard Archer, Chief European+UK economist at IHS Global Insight said "While the housing market seemingly paused for breath around February/March, it does still seem to have got a lot of life in it still. The bad weather in February clearly took a toll on activity during that month while it is likely that the further easing back in mortgage activity in March from January’s peak level reflected some banks raising their mortgage lending standards before the new regulations under the Mortgage Market Review (MMR) took effect on April 26th."

Meanwhile, the deputy Governor of the Bank of England Jon Cunliffe warned yesterday that surging house prices in the UK pose the single biggest threat to UK financial stability and that policy-makers must decide quickly whether to take action to cool the market and, in the starkest warning yet that rapid price rises could derail the economic recovery in the UK, argued that it would be “dangerous to ignore the momentum that has built up in the UK housing market”.

The euro also found support in the market yesterday after analysts predicted that Portugal will announce that it will leave its €78 billion international bailout programme with no ‘back-stop’ ahead of next Monday's Eurogroup meeting. If correct, Portugal will follow in the steps of Ireland and make a 'clean exit'. Portugal’s bailout programme ends on 17 May.

This afternoon sees the publication of the latest employment report from the USA which will be keenly watched for signs of the health or otherwise of the world’s biggest economy.