Sterling falls despite expectations for an interest rate hike

Enrique Díaz-Álvarez02/Sep/2015Currency Updates


A weaker than expected reading in business sentiment among UK manufacturers weighed on the Pound yesterday, causing Sterling to depreciate by 0.4% against the Dollar and versus the Euro.

In the UK economy, mortgage approvals continued to surprise on the upside. The number of approvals for mortgages in Britain rose to a seventeen month high, increasing from 66,582 in June to 68,764 in July. The increase is no doubt linked to the continued expectations of an imminent interest rate hike by the Bank of England, prompting more homeowners to lock in new mortgage deals at the current low rates.

Elsewhere, growth in the UK’s manufacturing sector moderated slightly in August, with the latest PMI from Markit falling to 51.5 in August, from 51.9 a month previous. The survey suggests that a strong Pound in trade weighted terms, currently hovering around a seven-and-a-half year high, is a continuing strain on UK manufacturers looking to export, particularly to the Eurozone.

Construction growth from Markit at 9.30am and the latest Halifax house prices set for release this morning could both cause moderate volatility in Sterling today.


Despite strong gains as markets opened in the UK, the single currency ended the session unchanged versus the Greenback.

The Eurozone economy was given an unexpected boost yesterday, with the unemployment rate registering a surprise improvement on last month. The jobless rate decreased from 11.1% to 10.9% in July according to Eurostat, after no change was anticipated. This marks the lowest rate of unemployment in the currency bloc in three years, with the number of those in employment rising by the most in four years. Meanwhile, manufacturing growth dipped marginally in August, down from an index of 52.4 to 52.3 and remaining consistent with growth in the industrial production sector of approximately 2% on an annualised basis. Germany and Italy in particular, both saw strong expansion.

The producer price index will be the focus in the Eurozone this morning. However, traders will have one eye on Thursday, and the European Central Bank’s interest rate decision and statement following its latest monetary policy meeting. Mario Draghi is widely expected to strike a slightly dovish tone in order to push back recent gains for the Euro.


Solid USD gains against the Pound and the Euro were negated by a sharp appreciation of the Japanese Yen against the Dollar. However, the US Dollar index still ended trading 0.1% higher against its basket of major peers.

A series of data releases in the US economy yesterday was mostly mixed. The monthly manufacturing index from the Institute for Supply Management disappointed, falling from 52.7 in July to just 51.1 in August, its lowest reading since May 2013 and edging closer to the level of 50, which separates growth from contraction. Much like in the UK, the US manufacturing industry continues to be hampered by a strong currency. The prices paid index, a further measure of manufacturing performance, also dipped more than expected, falling from 44.0 to 39.0, its weakest reading since March.

By contrast, there were some positive developments in the construction industry in July, which expanded to its highest level in more than seven years. Spending increased by 0.7% month-on-month to a seasonally adjusted $1.08 trillion, and was boosted by rising construction of houses, factories, and power plants.

All attention in the US this week will be on Friday’s labour report, critically this month’s nonfarm payroll figure. In the meantime, today we’ll see factory orders and nonfarm productivity figures in early afternoon.

Rest of the world

The Chinese central bank announced plans to tighten its restrictions on forward trading of its currency, the Yuan, from October, in order to curb depreciation following last month’s devaluation.

The Canadian economy entered into recession for the fits time in six years, contracting by 0.5% in the second quarter.

Meanwhile, the “safe haven” Yen rose strongly, following a further decline in Chinese share prices.


Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.