Manufacturing output grew at its fastest pace for 10 months, giving sterling a boost against other major currencies this morning.
Recovering losses against EUR & USD, the latest flash Purchasing Manufacturing Index (PMI) data today announced that UK output rose 51.9, up from 50.0 in January.
The question for many investors is whether the post-election economic pick-up is sustainable, and it’s important to note that the business activity index for the services sector dropped from 53.9 last month to 53.3, so it’s not a clear-cut picture just yet as the UK approaches its first month post-Brexit.
Sterling had a busy week, but the movements sometimes appeared counterintuitive. The week started in a familiar way when the UK’s Chief Negotiator David Frost reiterated the view that the UK may diverge from EU standards and put pressure on the pound as an indication that trade negotiations may be difficult to resolve. The pound fell an average of 0.3%, losing two fifths of a euro cent. However, when it came to the employment data, investors appeared to ignore the slowdown on wages growth and 0.5% quarterly fall in labour productivity. The pound made initial gains due to the positive numbers – 180k jobs added in Q4 2019, 3.8% unemployment rate and a record high 76.5% employment rate although it gave most of those gains back by the end of the day. The announcement of inflation data also had an impact on the pound, which moved lower despite inflation data coming in higher than expected. Headline CPI inflation accelerated from 1.3% to 1.8%, its highest level since July last year. After initial gains, sterling once again retreated as investors considered that in light of the data, higher interest rates from the Bank of England are unlikely in the near future. It seems that investors have been unsettled for most of the week, and are anticipating disappointing provisional PMI results which could add further pressure.
There was no significant news from Europe and the euro had a relatively quiet week. Once again, Germany was in focus as the economy stalled – GDP expanded by 0.3% but imports increased and exports decreased. Unsurprisingly, ZEW’s surveys of institutional investors in Germany and pan-Euroland found them less confident in February than a month earlier. In Germany, economic sentiment “decreased sharply in February, falling 18.0 points to 8.7”. For the euro zone as a whole the reading fell 15 points to 10.4 as the mood remains downbeat. The ZEW measures were the only ecostats of any consequence from Europe and they made investors disinclined to embrace the euro. It lost ground on almost every front, falling nearly half a cent against sterling. Investors are not expecting any surprises when the European Central Bank publishes a summary of its last monetary policy meeting, and in general the euro appears to be focussed on keeping afloat until the economy across Europe shows some improvement.
Whatever happens to the currency market, if you’re sending money overseas, you’ll need the help of a reliable foreign exchange service.
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