Strong UK manufacturing PMIs take the centre stage, Sterling rallies

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2 September 2016

Matthew Ryan

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

The UK’s manufacturing PMIs exceeded expectations and surprised economists by rising to 53.3, up from 48.3 last month. The positive news has caused many to suspect that Brexit fears may be exaggerated.

T
he strong PMIs benefitted Sterling yesterday and was also reflected rising yields on Government bonds.

Yesterday’s speech by EBC member and President of the Austrian National Bank Ewald Nowotny did not shake markets. He commented that, ‘in monetary policy, the prevention of deflation is the central task in the current constellation. That has been a success’.

Financial markets are impatiently waiting for today’s US labour report, with the crucial nonfarm payrolls figure. Experts are estimating that 180,000 jobs were added to the economy in August, but the recent trend in nonfarm payrolls could suggest an even higher result. If expectations are met, we can count on increase in the sentiment towards future US interest rate hikes, which should also be reflected in the price of the US Dollar.

Major currencies in detail:

GBP

Sterling finished the London session 1.1% higher against the US Dollar on Thursday.

Today’s Construction PMI is expected to remain at a very low level, of around – 46.1. However, yesterday’s Manufacturing Index suggests construction may also perform better than expected due to their moderate correlation.

EUR

The Euro rose 0.4% against the US Dollar yesterday.

European PMIs were close to expectations yesterday so their influence on currency markets was limited. The most important Manufacturing PMI, from Germany in August, remained at a steady level of 53.6. French and Spanish indices performed worse, at 48.3 and 51.0 respectively in August. Although, when combined, the Eurozone index was close to expectations with an average of 51.7.

The contrasting results across Eurozone economies reflect the distinct national challenges and show that monitoring national indices is just as – if not more – important than the combined European Indices.

Today we will see the PPI Index for the Eurozone in July, although focus will remain mostly on the US labour report.

USD

The Dollar declined 0.4% against its major peers on Thursday.

Initial Jobless Claims continue their positive trend with an above estimate 263,000 figure for this month. However, manufacturing data, in both the PMI and the ISM, came out below expectations, disappointing investors. ISM Manufacturing PMI came out as 49.4, versus 52.6 last month, and the 7-month low in the Index caused a selloff in the Dollar.

Yesterday, hawkish Fed member Mester commented that he does ‘not believe that at this point in the business cycle the current very low level of interest rates is an effective solution to these longer-run issues.’ Increasing expectations for a US rate hike.

Today, the main focus is the US labour report, which will be published at 13:30 UK time. The most important aspect is without doubt the nonfarm payrolls, although the level of US unemployment in August will also be under scrutiny. Markets expect unemployment to come in at 4.8%, compared to the previous month’s 4.9%.

There will also be a speech from Fed member Lecker, taking place after the publication of the labour report.

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