The Pound to Euro exchange rate soars to a 22 month high

The value of the Pound soared in the foreign exchange markets yesterday, hitting a new 22 month high against the Euro whilst remaining close to the recently achieved 6 year high against the US Dollar and also hit its highest level against the Australian Dollar since March.

The catalyst for this latest move in the currency markets was the publication of the latest data from the UK services sector which showed that the services sector continued to expand last month. Although the rate of growth slowed to a three-month low, on the back of this and data showing that the UK manufacturing sector is growing at its fastest rate for 7 months and the UK construction data for four months reinforced the idea that the Bank of England (BoE) may increase UK interest rates from their historic low of 0.5%, in place since March 2009 later this year rather than the much anticipated first rise during 2015.

Today’s data shows the sharpest increase in new business volumes for six months and the 18th month in a row of a rise in the UK services sector.

Markit's Chief Economist Chris Williamson said "The persistent strength of the PMI surveys raises the likelihood of policymakers deciding that a pre-emptive rise in interest rates later this year is warranted."

Meanwhile, CIPS Chief Executive David Noble commented that "Elevated levels of new work in June resulted in notable capacity constraints, which in turn also caused an increase in backlog accumulation and a tightening labour market. Reflecting these shortages in staffing levels, wages increased this month, pushing running costs up."

In its latest commentary on the UK property market, the Bank of England’s (BoE) Deputy Governor Jon Cunliffe has said that soaring house prices pose the biggest risk to the UK economic recovery as a sustained rise in prices outstripping people's incomes risks fuelling households' debt and sparking another economic crash.

Only yesterday, the Nationwide Building Society reported that UK house prices have now topped their 2007 peak with the average value of a UK property hitting £188,903 and, in London, exceeding £400,000 for the first time.

Yesterday afternoon, the European Central Bank (ECB) kept its policy unchanged, in line with expectations. Euro zone interest rates remain at their record low of 0.15%, the new level set only last month in an effort by the ECB to address weak inflation data and a poor economic recovery.

To add to the pressure on the Euro, data out yesterday on the German economy, the euro zone's largest registered a bigger-than-expected drop in industrial orders with May’s factory orders falling by 1.7% from April’s figure.

Nevertheless, year-on-year, orders rose by 5.5%, short of analyst’s expectations.

In a boost to the world wide economy, the US economy added 288,000 jobs in June according to the latest data from the Bureau of Labor Statistics (BLS) with the US unemployment rate dropped to its lowest level in over five and a half years.

Analysts had expected a total of 215,000 new jobs and the unemployment rate unexpectedly fell from 6.3% to 6.1%, its lowest since September 2008 as the number of unemployed fell by 325,000 to 9.5 million. It is worth noting that the US unemployment rate is now 1.4% lower than it was a year ago.

This boost to risk sentiment coupled with the better than expected data out of the UK this week led to the pound rising against the majority of the 16 most actively traded currencies in the currency markets yesterday. The stock markets also helped with the Dow Jones index in New York hitting the 17,000 level for the first time in history.