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Sterling edges lower after PMI miss, RBA slashes rates to record low

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2 August 2016

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

Sterling inched lower as markets opened for the week on Monday, with revised manufacturing data released yesterday morning ramping up concerns about a UK economic slowdown.

he UK’s manufacturing PMI was revised lower from its original flash estimate to a fairly abysmal 48.2 from 49.1, its lowest level since February 2013. Worryingly the level of new orders, which grew robustly in June, suffered its worst month since as far back as 1998. We think this bodes ill for tomorrow’s services PMI and further increases pressure on the Bank of England to cut interest rates at its highly anticipated monetary policy meeting on Thursday.

The Bank of England is overwhelmingly expected to announce an interest rate cut this week, with over 90% of top economists surveyed by Bloomberg now anticipating a 25 basis point reduction in the main rate. In anticipation of Thursday’s announcement, net shorts in Sterling last week increased to the most on record, suggesting that further weakness in the Pound could be on the horizon.

Meanwhile, we saw a slight recovery in the US Dollar on Monday after the greenback suffered its worst weekly performance in three months last week. The markets mostly overlooked a fairly underwhelming set of economic figures out of the world’s largest economy, which saw a fall in manufacturing production and slowing construction spending.

The Reserve Bank of Australia stole the headline during Asian trading.

Australia’s central bank announced it would be cutting its main interest rate by 25 basis points to a record low 1.5% in a bid to boost both growth and inflation. However, given this was almost entirely priced in by the markets, we saw little movement in AUD this morning.

Major currencies in detail:


The Pound steadied itself yesterday afternoon after an initial sell-off post PMI data, ending the London session 0.2% lower.

July’s dire PMIs have all but ensured we’ll see some form of action from the BoE this week. This morning’s construction index was a pleasant surprise, although still fell to 45.9, its lowest level in 7 years.
Financial markets are fully pricing in the possibility of a rate cut. We therefore think that the Bank of England will likely have to cut by more than 25 basis points in order to send Sterling back below 1.30 versus the US Dollar.

With expectations sky high there is scope for disappointment, especially if the Bank of England were to leave its quantitative easing programme unchanged.

We now look to tomorrow’s services PMI. A downward revision could pile further pressure on the Pound this week.


The single currency was little changed yesterday with investors mostly overlooking announcements in the Euro-area.

The Eurozone economy continues to appear mostly unfazed by the Brexit vote, with the revised manufacturing PMI for the Euro-area exceeding expectations. The index increased to 52 from 51.9, alleviating some concerns that the European Central Bank will waste no time in increasing its easing measures in the Eurozone. Germany and France both performed slightly better than expected, with Germany continuing to power the Eurozone with its PMI comfortably above the level of 50 at 53.8.

Revised PMIs across Europe are probably the most important pieces of data in the Eurozone this week. Producer prices this morning are unlikely to rock the boat, with the Euro expected to be driven by events in the UK and US this week.


The Dollar fell 0.1% against its major counterparts this morning.

Manufacturing output in the US economy fell short of expectations in July, with the flash PMI revised lower to 52.6 from 53.2. Construction spending was also disappointing, falling 0.6% in the month to June.

Overnight on Monday we had some contrastingly hawkish comments from Federal Reserve member William Dudley. Dudley even claimed the central bank could hike before November’s Presidential election, should we see a rapid improvement in the US labour market.

Income and spending data this afternoon could shift the Dollar today. Investors will no doubt have one eye on Friday’s crucial nonfarm payrolls report.

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