Central Banks Maintain record low interest rates as UK economy continues strengthen

Tom Tong02/Aug/2013Currency Updates

GBP

Yesterday was a positive day for the UK in terms of data releases. The Purchasing Managers Index (PMI) for manufacturing was released above the forecasted figure of 52.8, to an actual level of 54.6. As the sector’s fourth straight month of expansion, this is the strongest reading since March 2011, a positive signal indicating that the UK economy is likely to continue improving into Q3. According to the National Institute of Economic and Social Research (Niesr), UK GDP will grow by 1.2 per cent this year, double the amount estimated by the Office for Budget Responsibility.

In addition to these releases, the Bank of England’s MPC agreed to keep its monetary policy unchanged, with interest rates at the historic low of 0.5%, whilst maintaining its bond-buying program at £375 billion.

Despite the recent positivity, sterling fell against the stronger greenback in yesterday’s trading, with anticipation of next week’s quarterly Inflation report due to be released on Wednesday. Mark Carney is expected then to announce plans whether to adopt a “forward guidance” policy, and discuss the Bank’s intentions with regard to maintaining the low rate of interest for the foreseeable future.

Today’s key data release is the Construction PMI, with analysts predicting an increase to 51.6 from a previous reading of 51.0.

USD

On the first day of the new month we saw a considerable amount of data released from the US, which inevitably reflected the performance of the currency throughout the trading session, and signalled a good start of the third quarter. First, saw the Job Cut Announcements for July coming out at 2.3% compared to 4.8% the month before, leading to a better than expected Unemployment Claim – 326,000 compared to forecasted 346,000. Unemployment claim fell to the lowest since January 2009. While this is usually a volatile figure in July due to auto plants closing for retooling in July, economists who had expected new filings to rise to 346,000 said the general tone of the Labor Department report was consistent with a pick-up in job growth.

In later trading, we saw Final Manufacturing PMI and ISM Manufacturing PMI released. The Final Manufacturing PMI signaled the strongest manufacturing expansion in four months during July, ending up at 53.7, up from the eight-month low of 51.9 in June, and above the earlier flash estimate of 53.2. This PMI figure suggested a solid improvement in the overall manufacturing business conditions. With regards to the ISM Manufacturing PMI – a leading indicator of economic health, figures ended at the highest level since August 2011 at 55.4, beating the 52.1 forecasted. Manufacturing expanded as orders and production accelerated, indicating that factories were growing more optimistic about the second half of the year.

Other data released yesterday included Construction Spending m/m, ISM Manufacturing Prices, Natural Gas Storage and Total Vehicle Sales but its impact was not as significant.

As a result the USD rose 0.7% against the EUR during yesterday’s trading session.

Today, we are set to receive more data from the US – most important being the Non-Farm Payrolls, Personal Income MoM and Factory Orders MoM.

EUR

It was established yesterday that the ECB would abide by its forward guidance policy by keeping interest rates at 0.5 per cent. Mario Draghi stated “the governing council confirms that it expects the key ECB interest rates to remain at present or lower levels for an extended period of time.”

Draghi went on to express that the economic health of the single currency union was expected to improve, though not guaranteed, referring to the possibility of structural reforms under performing, or the decline of global demand.

For the first time in two years expansion is seen in the Italian manufacturing sector indicated by the PMI, rising to 50.4, against an expected reading of 49.8.

The Spanish manufacturing sector has retained stability through July, similar to June. There was a slight fall in output over the month, though minimal increase in new orders was noted.

Moving on to Greece, the IMF has made it clear that it is essential that the troubled state makes more of an effort to encourage growth in order to adhere to its pledged structural reform.

There is no tier III data releases from the Eurozone today.

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Written by Tom Tong

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