Plummeting sterling finds some support on PMI figures

In trading on Monday, the UK currency suffered one of its worst days in recent months.

During the morning session the pound tumbled by 2.0% against the euro whilst losing near 3.0% against the US dollar. The barrage of negative sentiment, built up against the pound, was given further ammunition after a YouGov poll showed the Conservative lead over Labour was down to just two points, its lowest level in two years. With evidence building about the possibility of a hung parliament, sterling was sold heavily hitting multi-month lows against a range of currencies.

Duncan Higgins, senior analyst at Caxton FX commented, "With the EU stalling on the situation in Greece, the market has taken a break from selling the euro and focus has turned to the pound. Few could argue that the fiscal situation in the UK is too dissimilar from that of the peripheral eurozone nations and sterling is suffering heavily as a consequence."

"Having fallen below key support at $1.50, the pound's decline looks set to continue. The near term outlook is looking particularly weak at present with the BoE Monetary Policy Committee unlikely to be changing their tune on quantitative easing any time soon. Meanwhile, in the US non-farm payroll figures on Friday look set to disappoint, which may encourage further safe haven buying. We are now expecting the pound to move toward $1.45," Higgins continued.

Duncan Higgins also stated, "There are glimmers of hope for the UK economy. Data this morning revealed that the UK services sector expanded at a much stronger rate than expected. The index moved to 58.4 for February, its highest level since January 2007. After January's surprisingly weak figure, this morning's data will come as a boost to the prospects of recovery. Movements in the currency markets have been muted, with direction still being taken from broader macro themes. The pound has come off its low, currently trading back above €1.10 and €1.50, but investors remain apprehensive ahead of the BoE and ECB policy announcements tomorrow."

There are also signs that the comparative weakness of the UK currency is providing benefits. Although largely unnoticed in the frantic markets on Monday, Mervyn King's desire to keep the value of sterling down is supporting the UK manufacturing industry. Data revealed that the industry expanded at a faster rate than expected in February, reflecting greater competitiveness in the export market and propping up hopes for the recovery.