Sterling dips on manufacturing miss, UK manufacturers continue to be impacted by economic slowdown
02/Mar/2016 • Currency Updates•
The Pound dipped against the Dollar on Tuesday after some weak manufacturing data suggested that the UK economy may be slowing this quarter. The manufacturing sector has been under heavy pressure of late, with a slowdown in the global economy providing a significant challenge for UK manufacturers looking to export. Demand from overseas has declined as uncertainty is beginning to creep into the minds of consumers.
In contrast, the US strengthened after the manufacturing sector in outperformed expectations in February, although it still contracted. A strong US Dollar continues to provide a drag on the industry, and will be a concern for Federal Reserve hawks when the central bank next meets later this month.
In the Eurozone, comments from a letter written by European Central Bank President Mario Draghi suggested that downside risks to the Euro-area economy had increased since the last meeting. Draghi highlighted volatility in the financial and commodity markets and its effect on weakening inflation dynamics.
A rebound in stock markets across the board sent the Yen sharply lower yesterday, while an increase in oil prices proved good news for commodity currencies. The Canadian Dollar and Russian Ruble rallied hard, with the former hitting a three-month high against the US Dollar after the Canadian economy grew more than expected in the fourth quarter of the year.
Earlier in the day, the Australian Dollar firmed after the Reserve Bank of Australia surprised few by keeping its benchmark interest rate unchanged again at 2%, providing precious new information in its accompanying commentary.
For the rest of the week all eyes will be on this Friday’s nonfarm payroll report. This report will give a very clear signal to the Fed on where the economy is at.
Major currencies in detail:
Sterling dipped marginally against the Greenback yesterday, falling by 0.25% after contrasting economic news across the Pond.
Activity in Britain’s manufacturing sector slumped to its lowest level in nearly three years in February. The closely watched PMI teetered dangerously close to contraction last month, falling to 50.8 from 52.9, its weakest print since April 2013. New orders for manufactured goods were particularly disappointing, recording the weakest growth since 2013.
Britain’s economy relied heavily on its dominant services sector for growth in 2015, with yesterday’s data suggesting the first quarter of this year will be no different.
This week looks set to be relatively light in terms of announcements in the UK, with Sterling likely driven more by external factors. The UK construction PMI this morning could cause moderate Pound movement today.
The single currency traded within a tight band on Tuesday, ending just 0.3% lower versus the US Dollar.
Economic data in the Eurozone yesterday proved to be fairly positive. The rate of unemployment continues to trend downward, falling more than expected for the fifth straight month by 0.1% to 10.3%, its lowest level since August 2011. The jobless rate fell once again in absolute terms in Germany, remaining at its record low 6.2% level.
This should give the ECB some comfort ahead of their monetary policy meeting next week. We’ll be running a Twitter chat during the press conference following the ECB Governing Council meeting. Tune in using the hashtag #EburyChat16.
Manufacturing growth also surprised on the upside, with the latest PMI from Markit rising to 51.2 from 51, albeit still hovering around its lowest level in a year. A sluggish start to the year for the Eurozone economy should force the ECB’s hand when it meets next Thursday.
Producer prices this morning are expected to remain deep in negative territory.
A weaker Yen and headwinds from encouraging economic data in the US caused the US Dollar index to increase by 0.3% on Tuesday.
Data proved strong across the board in the US. The manufacturing PMI from ISM increased on its previous reading, to 49.5 from 48.2, despite still representing a contraction. This was the fifth straight month the index had registered a below 50 reading, with a strong US Dollar making exports of manufactured goods relatively more expensive for overseas customers.
Encouragingly, construction spending soared in January by 1.5%, its greatest monthly increase in ten months. Overall spending is now at its highest level since 2007, providing further evidence that the economy is firming, having slowed in the fourth quarter of last year.
Private sector employment figures, seen as a good indicator for the monthly nonfarm payroll figure, will be released by ADP at 13:15 UK time today and could cause US Dollar movement today.
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