The Pound gives up some of its recent gains

The Pound started the latest trading week on the back foot, giving up some of the recent gains that’s aw it reach multi-month or multi-year highs against the majority of the 16 most actively traded currencies sin the currency markets yesterday.

The catalyst was the latest data from BDO and its Optimism Sub-Index for the UK manufacturing sector which saw confidence fall in June for the first time in 14 months amid fears about rising costs and a skills shortage.

Commenting on their own report, analysts at BDO indicated that UK manufacturers are taking a more cautious approach to potential challenges, such as rising operating costs and this could limit growth. Also, UK inflation expectations remain low although this could very well mask the threat to manufacturers from rising oil prices.

BDO Partner Peter Hemington said "UK manufacturers are under growing pressure from a shrinking pool of skilled workers and potential input cost increases, but confidence in the sector is high. This month's dip in confidence is a rational response to the issues businesses face and nobody should have expected the stellar growth we've seen in manufacturing so far this year to go on forever. But we still don't know when interest rates will rise and businesses cannot plan for growth on the basis of vague or conflicting statements - policy-makers can do more to provide certainty for businesses."

Of interest, BDO said that in contrast, the UK service sector seemed to be faring better with June’s Optimism Sub-Index for services firms speeding up from the May figure.

Given the overwhelming importance of the services sector in the UK economy, this has led to an overall improvement in UK business confidence.

The British Chambers of Commerce (BCC) added their voice to the debate about the timing of the first interest rate rise in the UK since UK interest rates were cut to their historic low of 0.5% in March 2009 by calling on the Bank of England to delay raising interest rates until the recovery is firmly established amid signs of mounting concern over higher borrowing costs. According to the BCC, the UK economy has continued to strengthen but not at the same pace as earlier this year as it placed its own forecast of 3.1% growth this year at risk of a downgrade.

The Pound’s fall against the Euro in the foreign exchange market was tempered by some poor economic data out of Germany, the largest and most important Euro zone economy with the German Federal Statistics Office reporting that German industrial production contracting by 1.8% month-on-month in May.

Analysts suggested that the impact of recent events in the Ukraine is having on business sentiment in Germany but the majority still feel that the German economy is still strong enough to weather these storms providing the situation in the Ukraine does not escalate badly as stronger demand from the US, the UK and stable growth in China is likely to offset this setback within a few months amid gradually firming domestic demand.