GBP wobbles but ends higher as manufacturing PMI remains strong

Despite losing some ground earlier in the day, the pound was able to end yesterday’s session firmly in positive territory.

The pound is tentatively holding at or above opening levels this morning. GBP/EUR has climbed 0.2% to €1.1289, while GBP/USD is stuck at US$1.3594. GBP/AUD has risen 0.2% to AU$1.7388, while GBP/NZD is flat at NZ$1.9154. GBP/CAD has inched up 0.1% to C$1.7018.

It’s a big day for data today. Read on to find out why outside forces are more likely to drive pound exchange rates than domestic data from the UK…

What’s been happening?

Manufacturing data was in ample supply yesterday, which first worked against the pound as markets were disconcerted by a greater than expected drop in the latest PMI.

GBP/EUR and GBP/USD exchange rates initially weakened after the latest data from IHS Markit revealed a slump in the index from 58.2 to 56.3, instead of to the forecast 57.9.

However, analysts welcomed the data, pointing out that this still showed the UK’s manufacturing sector was on solid form, with an average PMI reading of 57 points during the final quarter of the year.

While the pound did rally by the afternoon, Sterling faced heavy pressure in the morning after finalised Eurozone PMI’s for December confirmed that manufacturing in the currency bloc was expanding at its greatest pace in over 20 years - the entire duration of the Markit survey.

This indicates that the currency bloc is likely to have started 2018 on strong form, and markets are still hopeful that strength elsewhere in the economy will filter through to inflation over the coming months and make the European Central Bank (ECB) more inclined to tighten its loose monetary policy.

Markit PMIs were also providing support for the US dollar, after the manufacturing index for the States printed at a finalised 55.1; an unexpected uptick on the preliminary estimate of 55.

The score marked the strongest growth in manufacturing since the end of Q2 2015, and served to raise pressure on the Federal Reserve to hike interest rates again in the near-term.

What's coming up?

It promises to be busy day again today, although the UK’s construction PMI release will be the least influential of the data on offer from the UK, Eurozone and US.

Markets are more likely to pay attention to the construction PMI as an indicator of the general trend, rather than for what it signifies about a sector that has a relatively small contribution to total economic output.

Therefore, the pound could weaken if the construction index also performs worse than expected like yesterday’s manufacturing reading, as markets will begin to wonder whether this is a pattern that will be repeated in the vital services index tomorrow.

The euro could see some sharp movements today, and not just because of the domestic releases scheduled for publication.

German unemployment change and unemployment claims rate figures for December are due shortly, and the forecasts are for the unemployment rate to fall, which could give the euro boost.

However the US has key releases on tap as well, including the ISM manufacturing index and the meeting minutes from the Federal Open Market Committee’s (FOMC) policy gathering on 13th December.

We’re here to talk currency whenever you need us, so get in touch if you want to know more about the latest news or how it could impact your currency transfers.

Reaz Rahman
Senior Dealer

Reaz, our Senior Currency Dealer, joined us in January 2015. Reaz draws on his detailed knowledge of the foreign exchange markets to help customers to choose the right service and time to transfer.