UK Interest rate outlook sees Sterling fall ahead of Thursdays announcement

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With the UK enjoying the May day bank holiday yesterday the only data yesterday was from the Eurozone and US. In the Eurozone April manufacturing PMI was revised to 58.0 as both the German (62.0) and French (57.5) measures were really strong. 

In the US, the Institute of Supply Management (ISM) manufacturing index fell to 60.4 in April from 61.2 in March but remained above 60 for a 4th month and exceeded forecasts for 59.5.The reading was actually the best performance since March 1984.

Despite the UK holiday, the Governor of the Bank of England didn't have the day off and those hoping for some Sterling strength may have wished he did. Mervyn King, whilst Brussels, gave a warning that a rise in long-term interest rates would have "severe" consequences for the public and private sector. His comments left no doubt that those feelings would be carried with him to the Bank of England MPC meeting that takes place tomorrow and Thursday. The likelihood of Sterling interest rates going up this week is remote and therefore Sterling tumbled.

It had been quite a good period for Sterling but the Governor's comments spoiled a comfortable five-day run for Sterling. This morning it opens down a cent against the Euro and the US Dollar.

Overnight, the Reserve Bank of Australia Tuesday kept interest rates on hold at 4.75% as widely expected. Economists read enough into the central bank's statement though to continue to believe there will be higher interest rates later in the year.

The UK markets reopen today and economic data releases resume. The April UK manufacturing PMI is expected to come in little changed at 57.0 versus 57.1 in March, remaining firmly in growth territory at an above-average level. Focus will also be on the CBI's retail survey today, which signalled a subdued pace of UK retail sales over February and March, although today's figure may show a seasonal boost to volumes in the run up to Easter and the royal wedding.

In the Eurozone, producer prices are expected to be up in March while in the US factory orders will be released.