Following the confident sentiment towards the Pound after Tuesday’s positive service sector PMI, yesterday was a difficult day for Sterling. This was due to softer-than-expected factory output data which showed a 7% drop, from its pre-recession peak, in the manufacturing sector. Economists anticipated monthly growth in activity of 0.6%, however the forecast was inaccurate as manufacturing output only reached 0.3%.
Today will see the release of the Bank of England’s benchmark interest rate for August. Most investors agree that the outcome is likely to be insignificant as regards the strength of the Pound, because the BoE is unlikely to change the current interest rate at 0.50%, a rate which has remained consistent since March 2009.
Although the Eurozone’s largest economies posted some less-than-ideal news yesterday, the single currency managed an appreciation of a quarter-cent against the Pound.
The 18-nation bloc’s largest economy (Germany) reported a dip in factory orders of -4.3%. They also reported a disconcerting forecast of +1.1%, decidedly lower than May’s expansion of +7.7%. To add fuel to the fire and further dampening the demand for the Euro, the bloc’s third-largest economy, Italy, posted contraction for the second consecutive quarter. The first quarter saw a depreciation of -0.1%, which was followed by a second quarter cooling of the Italian economy by a further -0.2%. Italian GDP has shown declination in 11 of the last 12 quarters.
Despite the negative German and Italian figures, the Euro managed to escape relatively unscathed. This is because trader’s focus was on the UK’s less-than-impressive manufacturing figures, and the bleak NIESR British growth forecast.
Today’s European Central Bank decision is unlikely to effect a change, as most believe that President Mario Draghi will remain consistent in his outlook for monetary policy. However, should the ECB hint at an upcoming QE scheme it will have a significant impact on demand for the Euro.
US Dollar (USD) Exchange Rates
Following lacklustre British data yesterday, Sterling lent towards technical support levels against the US Dollar. The manufacturing production print of only 0.3% was coupled by a similarly uninspiring GDP estimate of 0.6% from the National Industry of Economic and Social Research (NIESR). The unimpressive headline figures allowed those traders determined on weakening the GBP/USD pairing to overlook another solid British housing print. July saw Halifax’s index of UK house prices accelerated by 1.4% monthly and 10.2% annually.
‘Greenback’ demand heightened fractionally after US data showed the nation’s trade deficit had diminished from -44.7 billion to -41.5 billion in June.
Canadian Dollar (CAD) Exchange Rates
The Canadian Dollar surged against the Pound yesterday following the soft British manufacturing data. Canada’s trade surplus was shown to have widened from 576 million to 1.9 billion during June as a result of an unexpected 1.1% rise in exports and a steep -1.8% decline in imports. The GBP/CAD pairing maintained a gentle gradient throughout the course of the day.
Australian Dollar (AUD)
Yesterday saw the Pound to Australian Dollar exchange rate lower by around -1.1 cents after disappointing UK manufacturing output data and an underwhelming GDP forecast. AUD gained increased strength against the Pound following the Reserve Bank of Australia’s decision not to cut rates earlier in the week.
The early morning Australian unemployment figures allowed the GBP/AUD to recover yesterday’s losses, with Australia’s unemployment rate unexpectedly jumping from 6.0% to 6.4%, a twelve-year high.
New Zealand Dollar (NZD)
The GBP/NZD pairing softened by over a cent yesterday following positive unemployment figures. This strengthened expectations of another rate hike by the Reserve Bank of New Zealand, despite last month’s intimations of the intention to pause the current hiking cycle. The steep decline from 5.9% to 5.6% helped to accelerate confidence toward a return to hawkish monetary policy.
South African Rand (ZAR)
Yesterday saw the South African Rand suffer against most of the majors, although speculation was rife for a reversal in anticipation of upcoming reports of significant importance. One such report is due today and concerns year-on-year manufacturing production in South Africa.
The strength of the Rand is unlikely to be changed dramatically, however, until the resolution of the current metal workers strike. The National Employers Association of South Africa (NEASA) states that a 10% hike in pay could be disastrous for small businesses within the steel and engineering sectors. NEASA represents 22 members who employ around 70,000 workers. They claim its members can only afford a rate hike in the region of 7%. Despite the national strike ending last month, the continuation of the metal workers strike will be detrimental until resolved.