LONDON (AFX) - The euro was marginally higher in midday trade still on technical factors although its general weakness is expected to continue amid a deteriorating euro zone economy, dealers said. The euro's general weakness is expected to persist despite some support coming through after yesterday's tumble, Deborah Reed, economist at Bank of America said.
"With the ECB implying that there will be no shift in rate policy, the euro is being undermined further," she said.
Still ahead is the afternoon's US labour market report which is more likely than not to be slightly negative, Reed said, citing weak survey data earlier in the month.
There may be a brief initial reaction in favour of the euro but again it is most likely to fade, she said.
"It is important to note that the US payrolls are a lagging and not a leading indicator," she added.
Meanwhile, the dollar rose past the 125 yen level but appeared unable to pierce 126 yen. The overwhelming majority of news out of Japan has been negative and more bad news is expected before any turnaround is likely, dealers said.
Sterling slipped slightly, affected by the general weakness of the euro but also on the back of a weak outturn in industrial production. Total output of the UK production industries fell a seasonally adjusted 0.9 pct month-on-month in May, which left it 1.9 pct down on the year. The monthly fall was the sharpest since August of 1997 while the annual decline was the biggest since November of 1991.
The fall suggests that the manufacturing sector as a whole remains extremely depressed, Ciaran Barr, economist at Deutsche Bank said. While the fall is in line with the weakness seen in the survey evidence, such as the PMI and CBI surveys, the implications for second quarter GDP later this month are severe.
"A fall in Q2 would mean that it is the third consecutive quarterly decline in industrial production," Barr said.
"With growth below trend, and survey evidence soft, we continue to believe that unemployment will yet increase. As such, it looks too early to call the turn in the rate cycle," he added.
It looks like the Bank of England will hold rates for some time despite the weakness in the manufacturing sector, Reed at Bank of America said.