Euro round up

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This story will by now have become a familiar one to regular readers: The sterling/euro exchange rate is spending most of its time in a narrow corridor between €1.19 and €1.21. It first took up residence there in mid-December and investors have come to the conclusion that it is perfectly suited to its environment. That has not prevented them trying to take it off in one direction or the other. However, since the beginning of March there has been only a handful of those excursions and none has carried as far as a cent beyond the boundary.

Both during the Euroland sovereign debt crisis and in the uneasy peace that has followed the second bailout for Greece, the attitude has been that Britain's economic success depends on the euro zone. The one cannot prosper if the other fails. As someone famously put it; "we are all in this together".

That assumption looked more questionable in early April after the monthly Purchasing Managers' Index (PMI) shootout. PMIs are calculated nationally from questionnaires filled in by a broad range of companies, sorted by business sector. In essence, if every aspect of activity is getting better the firm scores 100%; if everything is deteriorating it scores a zero. Average the scores and the result is somewhere between zero and 10. A 50 means equilibrium; business is neither growing nor shrinking. Zero would be a wipe-out and 100 the unachievable maximum.

Surprisingly, the most recent results, for March, show Britain performing appreciably better than Euroland. In the services sector the UK scored a 55.3, trouncing Germany's 52.1 and Euroland's (negative) 49.1. For manufacturing the comparison was even starker. Britain was in the growth zone at 52.1, wiping the floor with the euro area where every country - including Germany and France - was below 50 and shrinking.

It has yet to be seen whether the UK performance is bankable or just a flash in the pan. Nevertheless, for British manufacturers to be considerably more upbeat than their competitors in Rhône-Alpes and the Ruhr cannot pass by unremarked by investors.

The improved sentiment towards sterling could provoke another foray to the north of €1.21 but significant progress beyond there would be hard to come by, if only because there will be a queue of buyers trying to pick up euros at a 21-month low. Otherwise, look for more of the same between €1.19 and €1.21.

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