Volatility for Pound Sterling as manufacturing data misses forecasts

The pound went on a bit of a ride yesterday, notching up strong gains early in the morning, surrendering these during the day, and then recovering somewhat towards the end of the session.

The pound is on mixed form this morning, weakening versus its safer peers, but making gains versus the commodity trio. GBP/EUR has fallen -0.1% to €1.1394, with GBP/USD down by a similar amount to US$1.4251. GBP/AUD is up 0.3% to AU$1.7790, with GBP/NZD also 0.3% higher at NZ$1.9335. GBP/CAD is just above opening levels C$1.7500.

Read on to find out why pound Sterling was on rocky form during yesterday’s session…

What’s been happening?

The pound seesawed yesterday, starting the day on strong form, losing most of its gains throughout the session, and then rebounding somewhat by the end of trading.

January’s Markit manufacturing PMI caused some jitters for GBP after unexpectedly falling to 55.3 - a fall that was worsened by the fact the previous month’s index was retrospectively revised down to 56.2.

While still a solid result, markets were nonetheless unimpressed and thus began to sell Sterling.

GBP spent much of the day below opening levels versus the EUR, after the morning’s Eurozone manufacturing PMIs confirmed that the currency bloc economy has started the year on buoyant form.

The only below-forecast result from the latest indices was the German index, but even this only edged lower by -0.1 point to 61.1; a huge 11 points above the neutral 50 mark which separates growth from decline.

The US dollar was largely on weak form, even though by rights it should be experiencing strong demand and accelerating away from its recent notable lows.

Although the ISM manufacturing index for January clocked in much higher than expected, weakening from 59.3 to just 59.1 instead of dropping to 58.6 in line with the projections made by economists, markets were perturbed to see the first drop in non-farm productivity since the beginning of 2016 during the fourth quarter.

What's coming up?

The UK construction sector is a small contributor to the nation’s GDP, but today’s PMI could still be influential as it could build upon the poor performance of the manufacturing index yesterday to reveal a pattern of weakness in the UK economy as 2018 began.

A fall in the index could see markets fearing that next week’s services sector PMI - which chronicles growth in the sector responsible for nearly 80% of all UK economic output - will also post a decline, which would weigh on the pound going into the weekend.

Eurozone data was rather thin on the ground, but the December producer price index figures will show whether manufacturers were facing rising or falling costs for the materials they required. A slowdown in growth is predicted, which suggests manufacturers will not need to raise their prices by as much to compensate, slowing the pace of inflation in the currency bloc and therefore raising doubts over the monetary policy outlook.

The US will release the vital non-farm payrolls report for January today. This is one of, if not the, most impactful reports in terms of influencing Fed monetary policy decision, so a strong showing here would boost hopes of a rate hike in March and also of further rate hikes later in the year. GBP/USD could therefore be set to weaken if forecasts of 180,000 are met or exceeded.

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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.