UK factory output surges ahead of Bank of England meeting this Thursday
03/Nov/2015 • Currency Updates•
Businesses are already beginning to focus on “Super Thursday”. This Thursday we’ll see two major events in the UK, the MPC Monetary Policy Statement and quarterly inflation report from Mark Carney. This will be followed by the crucial labour report out of the US on Friday.
Therefore, this is likely going to be a volatile week. Whilst we still believe that the US is winning the race to hike interest rates first, any significant deviations from the expected data on Thursday could cause dramatic fluctuations for GBP/USD. Accordingly, we’re observing businesses taking action prior to these events.
Hopes of an earlier-than-expected interest rate rise by the Bank of England were given a boost yesterday, following the release of the latest manufacturing PMI, which showed that growth in the industrial sector soared last month.
The data provides further weight to our argument that the UK central bank will begin hiking rates in the second quarter of next year, and thus provide good, long-term support for Sterling. International businesses now need to consider how this support will compare to the support expected for the US Dollar as the Federal Reserve moves closer to an interest rate hike.
There’s little in the way of major economic indicator data today, with UK construction growth this morning and US factory orders at 3:00pm GMT the only data points likely to influence the major currencies.
A speech from Mario Draghi in Frankfurt after the London market closes this evening will also be worth noting for UK businesses with exposure to the Euro. However, with the President of the ECB not expected to touch on monetary policy, it could therefore prove to be a non-event.
Major currencies in detail:
Encouraging data out of the manufacturing sector of the UK economy gave Sterling a major boost yesterday morning.
The currency appreciated to its strongest position in ten weeks against its basket of currencies. However, this rally faded as the day progressed, with the currency ending unchanged against the US Dollar.
Activity in the manufacturing sector surprised even the most optimistic of forecasts. The PMI from Markit increased to 55.5 in October from 51.8 in September, with any figure over 50 representing expansion. The reading was considerably higher than expected and the highest recorded by Markit since June 2014, despite a relative strengthening in the Pound during the same time period.
Such strong data suggests that the economy could grow twice as fast in the final quarter of the year as it did in the third quarter, although traders will look to Wednesday’s Services PMI for more evidence.
The construction PMI will be next on the agenda for Sterling traders ahead of Thursday’s Bank of England announcement. Any positive surprises similar to yesterday’s manufacturing data will likely lead to another GBP rally.
The single currency traded mostly within a narrow band of the US Dollar yesterday, ending the UK trading session 0.2% lower.
Yesterday’s lack of movement in the Euro came despite the latest Eurozone manufacturing PMI showing that the ECB’s large-scale quantitative easing programme has done little to spur growth in the industrial sector.
The PMI from Markit increased modestly to 52.3 from 52.0 in October, although growth in Germany hit a three-month low, while the same measure in Spain registered its lowest reading in almost two years.
The report points to factory output growth around the 2% per year mark, which would prove a fairly lacklustre performance given the existing stimulus package has been in place since March. It’s unsurprising that traders are heavily expecting the ECB to ramp up its easing measures at its next meeting in early December.
With no data of note out of the Eurozone today, traders will look to monetary policy clues from Draghi this evening, who is set to speak at an event in Frankfurt, Germany.
The US Dollar was little changed against its peers yesterday, up by just 0.2% after some mixed economic data.
Similarly to the Eurozone, there was some relatively weak manufacturing data releases in the US yesterday which showed that the industrial sector barely grew in October. According to the Institute of Supply Management, growth slowed for the fourth straight month from a PMI of 50.2 to 50.1. The manufacturing industry continues to be hampered by a strong Dollar and relentless spending cuts by energy firms.
By contrast, there was positive news after construction spending in the US rose to its highest level in seven and a half years. Spending increased by 0.6% and has now increased in every month so far this year.
A string of economic data out of the US today are all mostly second-tier, although could cause moderate US Dollar volatility. Factory orders data this afternoon will be the focal point, which is expected to print negative for the second straight month.
Rest of the world
The Turkish Lira strengthened against the US Dollar by the most since 2008 after President Recep Erdogan’s ruling AKP party won an outright majority at Sunday’s election. Businesses with Lira income are using the situation for conversion to maximise G3 returns.
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