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The Pound continues to fall

Published: 9 Jul at 9 AM Tags: Pound Sterling, Euro Exchange Rate, Dollar Exchange Rate, Currency Exchange, Euro Crisis, UK, Economy,

The pound continues to lose ground against the majority of the 16 most actively traded currencies in the foreign exchange market yesterday.

The catalyst was worse than expected UK industrial production figures. According to the Office for National Statistics (ONS), UK industrial production fell by 0.7% in May which came as a shock as the majority of analysts expected a small rise. The culprit seemed to be a fall in manufacturing output with economists blaming weaker demand from overseas as well as the knock-on effect of a strengthening Pound.

The data also showed that UK manufacturing output contracted by 1.3% month-on-month and 3.7% year-on-year.

Chris Williamson, Chief Economist at Markit, noted that the ONS data was in contrast to recent buoyant business surveys including data from the likes of the Confederation of British Industry (CBI) and the British Chambers of Commerce (BCC), both of whom suggest that the UK manufacturing sector is growing strongly.

Williamson said "The decline in May was the largest seen since January 2013 and also contrasted with rising production in prior months. The ONS offered no explanation for the surprise collapse in production, so we suspect the May downturn is a rogue number and the sector will rebound again in June,".

For his part, Martin Beck, senior economic advisor to the Ernst & Young ITEM Club, added that the latest figures "should not be a serious cause for concern" as, on an annual basis, industrial production and manufacturing output both continued to grow at a solid rate adding that "Even if industrial production remains stable in June, it will still be above its Q1 levels. The sector only contributes around 15% to overall economic activity, so we would caution against reading too much into the weak monthly number. Overall, today’s numbers do not change our expectations of GDP growth of 1% in Q2, exceeding the pace seen in the first three months of the year.”

Whilst the Euro benefited against the pound, rising for the third day in a row, it fell again against the US Dollar after European Central Bank (ECB) Executive Board member Sabine Lautenschlaeger said yesterday that an asset-buying programme should only be used in the event of an emergency such as deflation.

Her comments come after ECB President Mario Draghi said at his monthly news conference last Thursday that the bank's Governing Council was "unanimous in its commitment to also using unconventional instruments within its mandate, should it become necessary". The ECB is under mounting pressure to rein in the strength of the Euro which exporters across the continent are complaining are making euro zone exports uncompetitive in worldwide export markets.

In Germany, the largest and most important euro zone economy, the latest data from the German Statistics Office shows that the German trade surplus widened to €18.8 billion in May from a surplus of €17.2 billion in April but German exports fell by 1.1% month-on-month in May after rising 2.6% in April. Imports declined by 3.4% in May following a 0.2% increase in April.