The Pound to Euro continues to fall

The Pound fell in yesterday’s foreign exchange markets after the Office for National Statistics reported some worse than expected UK construction data in yet another sign that the UK economic recovery has lost speed in the second quarter of this year.

UK construction output unexpectedly fell by 1.1% month-on-month after rising by 1.2% in April. Analysts had expected to see growth of around 0.9% for the period.

Chris Williamson, Chief Economist at Markit, said that the weaker than expected figures, alongside the disappointing manufacturing output for May, "suggest that policymakers will be encouraged to err on the side of caution about hiking interest rates too early in what looks to be a still-fragile recovery".

The EUR took advantage in the currency markets, despite some poor data and news out of the euro zone at the start of the latest trading week in the currency markets.

In Spain, Moody's Investors Service remains concerned about the Spanish banking system despite recent improvements. In their report “Banking System Outlook: Spain” published only yesterday, Moody’s acknowledge an improving trend in economic conditions, liquidity and capitalisation but are still maintaining their negative outlook on the Spanish banking sector which has been in place since 2008.

Moody's highlighted Spain's real estate sector commenting that it “will continue to weigh on the banking system's performance, as the oversupply of residential property continues to depress prices”.

Meanwhile in neighbouring Portugal, the Bank of Portugal ordered Banco Espírito Santo (BES) to hold an extraordinary board meeting on Sunday to ring the executive changes and Portuguese Prime Minister Pedro Passos Coelho ruled out using public money for a bailout should one be needed.

The value of BES shares fell by 36% last week on growing concerns over the exposure to the holding company Espírito Santo International (ESI) after scheduled payments of short-term debt were delayed.

Only last Friday, the Bank of Portugal stated that BES would not need any bailout funds stating that “BES holds a sufficient capital buffer to accommodate possible negative impacts arising from its exposure to the non-financial arm of Espírito Santo Group (GES), without jeopardising its compliance with the required minimum capital ratios”.

Finally, Eurostat reported that euro zone industrial production declined by less than expected in May with production output dropping by 1.1% from April’s figure.

Eurostat explained that May's decline seems to be due to fall in the production of intermediate goods of 2.4%, non-durable consumer goods by 2.2%, durable consumer goods by 1.8% and capital goods by 0.5%. Year-on-year, industrial production grew by 0,5%, in line with analysts’ estimates.

Despite this data, the Euro held steady against the US Dollar but made further inroads against the Pound which has now come off the 22 month high registered against the Euro earlier this month for six days in a row.