Pound at a 4 ? year high against the dollar

The pound opened this short trading week close to a 15 month high against the euro and at a 4 ½ year high against the US dollar as UK economic data continues to improve.

Markit reported yesterday that both the UK services and manufacturing sectors grew at a faster than expected rate in April. Markit's 'all sector' purchasing managers index (PMI) rose to a five-month high of 59.4 in April.

Markit's Chief Economist Chris Williamson commented that "Such a rate of growth in the second quarter would lift gross domestic product above its pre-recession peak, extending further the strongest spell of economic growth that the country has seen since the financial crisis struck. With the outlook brightening, the pace of job creation hit a record high."

The latest data also shows an acceleration in the rate of economic growth to the fastest since last November and one of the highest rates of growth seen in the history of the survey.

Meanwhile, the construction sector saw an easing in the previous near-record rates of expansion to a six-month low in April but the survey also showed ongoing strong growth across all construction sectors whilst activity in the services sector grew at the sharpest rate seen so far this year and manufacturing saw the strongest increase, reporting the third-largest monthly rise in production seen since the survey began in 1992.

Howard Archer at Capital Economics commented "Overall, the April purchasing managers surveys tie in with our view that UK GDP growth is now well on course to reach 3.0% in 2014. Furthermore, much improved confidence has led consumers to increase their discretionary purchases on consumer services. Increasing purchasing power should further support demand for consumer services over the coming months. The Bank of England agents reported in their April summary of business conditions that “consumers had become increasingly willing to spend on leisure activities, eating out, home services via broadband and holidays."

Analysts are predicting that the Bank of England (BoE) is likely to keep UK interest rates unchanged when they meet to announce their latest policy announcement tomorrow but the odds have shortened as to a pre-election hike. Only last week, BoE Governor Mark Carney said that he is still ‘comfortable’ with UK interest rates at their record low level of 0.5%, a rate that has been in place since March 2009 but with the economy growing at its fastest pace for nearly seven years, the unemployment rate down from 7.9% to 6.9% in the past 12 months and a booming property market, pressure is mounting on the BoE to act.

Finally on the UK, the Organisation for Economic Co-operation and Development (OECD) raised its forecast for the UK economy to grow by 3.2% this year. The OECD added to the chorus of those warning that soaring UK house prices are one of the biggest risks that could blow the recovery off course. The OECD also said that the UK economy is likely to grow strongly thanks to business investment and private consumption.

The euro also made gains against the dollar after data showed that euro zone economic growth hit a three-year high and April is now the tenth consecutive month of growth in the sector.

Germany led the way but France, the second largest euro zone economy remains near stagnation.

The US dollar remains ‘unloved’ despite much better than expected US unemployment data with US non-farm payrolls rising by a much bigger than expected level of 288,000 in April according to the Bureau of Labor Statistics (BLS). The US unemployment rate also dropped from 6.7% to 6.3%, far below the 6.6% rate expected by analysts.

Overnight, the Reserve Bank of Australia kept interest rates unchanged at 2.5% for the ninth month in a row. Of interest, the RBA seem slightly more upbeat in their latest assessment of the Australian economy.

Reserve Bank governor Glenn Stevens stated that "There has been some improvement in indicators for the labour market, but it will probably be some time yet before unemployment declines consistently" following a positive jobs report with the unemployment rate falling to 5.8% in April.

Analysts now suggest that the Reserve Bank's preference for "a period of stability in interest rates" could extend well into 2015 as long as price rises remain subdued as is expected.