Pound Sterling (GBP) Stutters: Best GBP to Dollar Rates Out of Reach, But vs the Euro Recent Highs are Held

The British pound (GBP) exchange rate complex came under pressure in the run up to the long weekend with profit-taking being seen across the board.

This weekend, the forex markets are giving us the following rates:

• British Pound to Euro exchange rate: 1.1968
• British Pound to US dollar: 1.2572
• British Pound to Australian dollar: 1.9433
• British Pound to Canadian dollar rate: 1.7702
• British Pound to New Zealand dollar rate: 2.1563
• British Pound to South African Rand rate: 22.8661

We continue to see 17 month highs being offered to euro buyers.

"Sterling bulls have feasted on the contrasting outlooks for monetary policy in Britain, where the talk is of higher rates, compared to growing calls in the euro zone for stronger monetary stimulus. Downside risks for the pound should be held in check by expectations that Britain may boost rates ahead of its big peers from the U.S. and euro zone," says a pre-weekend report from Western Union.

Why are the pound to euro and pound to dollar exchange rate getting softer?

According to one analysis offered by Kathy Lien at BK Asset Management, the weakness of the British pound was driven by a sharp increase in public sector net borrowing.  

Economists were hoping for borrowing to decline to 3.4B from 4.9B but instead it jumped to 9.6B in the month of April from 6.1B.  

These disappointing numbers deal a blow to the Treasury's attempts to reduce the deficit to 11% of GDP over the next 12 months.  

"It is not unusual to see a correction in GBP/USD after 5 days of consistent gains and the uptrend remains intact as long as the currency pair holds above 1.67," says Lien.

The end of the bullet-proof GBP?

There was also yesterday's GDP data release which did come in line with estimates. However, it would appear markets were secretly hoping for a better outcome.

Lloyds Bank Research say:

"The bullet proof performance seen by GBP over recent sessions was challenged yesterday to a slight extent primarily as data releases tended to print in line with expectations.

"Regardless there was a notable loss of upside momentum over the course of the session and the much vaunted break by GBP/USD above 1.70 remains elusive."

Euro exchange rates: PMI data being digested

The eurozone PMIs yesterday were consistent with recent history in that they presented a very mixed picture both across sectors and geographically.

"Nonetheless the overall tone of data remains supportive of the gradual recovery theme and as such the on-going positive structural forces in favour of the EUR remain in place," say Lloyds.

Markets: The ETX Capital Review

The following market report comes courtesy of Daniel Sugarman at ETX Capital:

European stock markets fell Friday, erasing previous session gains amid caution as EU elections kick-off, with some underwhelming German IFO data dampening the mood further.

EU elections today – people in the region head to the polls to cast votes.

We have Ukrainian elections on Sunday which prompt some nerves, though the withdrawal of forces by Russia this week has been seen as sign of de-escalation of the crisis, so markets are exhibiting less discomfort than usual. What is a little more worrying for global investors - particularly those with a strong focus in Asian assets - is the military coup in Thailand which is dominating the headlines.

With the long holiday weekend in most parts of Europe, traders are taking no chances, cutting down exposure to risk, with disappointing German IFO data denting the mood further. Like the ZEW survey out of Germany last week which fell short of expectations, the IFO survey reached its lowest level of the year in May. The survey's "business climate" component fell to 110.4, down from 111.2 in April, and just under the 110.9 predicted by economists.

The current conditions component was a little better but the forward looking component declined – clearly the weaker run of German macro data seems to be one of the drivers behind the recent dovish stance taken by the Bundesbank who have now endorsed a broader stimulus approach by the ECB next month.

Elsewhere, on a brighter note, Greece’s credit rating was increased by Fitch Ratings with its long-term debt to B, five levels below investment grade, from B-. Fitch said that’s due to an improving economic and fiscal outlook for the country that sparked the euro area’s sovereign-debt crisis. Meanwhile, S&P Ratings upgraded Spain’s rating one level to BBB from BBB-. Looking ahead, we have US new home sales data which will be eyed eagerly.