Homepage » News » EUR/GBP » UK Manufacturing Weakens from 2.5 Year High; GBP EUR and GBP USD Recovering

UK Manufacturing Weakens from 2.5 Year High; GBP EUR and GBP USD Recovering

Update; The Markit Construction PMI for the UK is set for release shortly. While the Pound has been able to edge higher this morning after recent losses, investors remain cautious on fears that the index could see a greater-than-expected fall, just like the manufacturing PMI yesterday.

Original article continues below…

UK manufacturing activity fell further-than-expected in February, although the drop to a three-month low still leaves the sector performing near a two-and-a-half-year high. Pound Sterling has held gains versus the Euro and remains stuck at opening levels against the US Dollar.

IHS Markit’s latest survey of manufacturers saw the overall index fall from 55.9 to 54.6 against expectations of a drop to 55.6.

Although rates of expansion in output and new business lost impetus in February, growth remained comfortably above the long-run averages,’ Senior Economist at IHS Markit Rob Dobson explained.

In fact, the index shows the sector is still on track to record a strong performance during the first quarter of 2017, stating, ‘the survey is signalling quarterly manufacturing output growth close to the 1.5% mark so far in the opening quarter which, if achieved, would be one of the best performances over the past seven years.

Business confidence appears to be holding up well, with the report finding that businesses were largely expecting improved demand and to invest more capital in expansion and new product launches.

The outlook on consumer confidence also improved, with mortgage and consumer credit figures suggesting households were still happy to borrow money.

Mortgage approvals rose above forecasts in January, climbing from 68,270 to 69,930, although the volume of money borrowed was lower-than-expected at £3.4 billion rather than £3.7 billion.

Consumer credit figures also surpassed projections, rising to £1,416 million rather than £1,400 million.

GBP EUR has been able to hold its gains, despite the rather mixed data. Eurozone PMIs have largely disappointed, although headline Germany employment figures beat predictions. French manufacturing weakened by -0.1 point further-than-expected to 52.2, while the German index only rose 0.4 to 56.8 instead of to 57.

Even though the Italian manufacturing index climbed from 53 to 55 instead of 53.5, the overall Eurozone survey was unexpectedly nudged lower to 55.4 from 55.5.

German unemployment figures have improved above-forecast. Unemployment remains at a seasonally-adjusted 5.9% as expected, but the number of jobless declined in February by more-than-expected; -14,000 against predictions of -10,000.

The figures have not been positive enough to undermine the current trajectory of GBP EUR exchange rates, especially when investors are awaiting more vital Eurozone data later in the day.

German consumer price index figures for February are set for release this afternoon.

Month-on-month inflation is expected to return to growth after January’s -0.8% contraction, with analysts forecasting price growth of 0.6%. Year-on-year inflation is predicted to accelerate from 1.9% to 2.1%.

If annualised forecasts are correct, this would put the pace of price growth in Germany above the European Central Bank’s (ECB) target range.

This is likely to improve investor demand for the Euro, although in all probability Eurozone policymakers will state that above-target inflation in the bloc’s strongest economy must be tolerated until the weaker members are all exhibiting signs of overheating.

Meanwhile, the US Dollar is being kept soft by a mixed reception to US President Donald Trump’s long-awaited speech to Congress.

Markets had been hoping for details on his fiscal plans for boosting the economy by increasing infrastructure spend, creating jobs and drastically reforming the tax system.

However, the Republican remained vague on his plans. Where investors and politicians wanted clear direction, the President stated only that ‘to launch our national rebuilding, I will be asking the Congress to approve legislation that produces a $1 trillion investment in the infrastructure of the United States — financed through both public and private capital – creating millions of new jobs.’

He also repeated an earlier pledge, made during his inauguration speech, that ‘this effort will be guided by two core principles: Buy American, and Hire American.

This is far from the level of clarity markets were looking for, yet the repetition of the US$1 trillion figure and reference to legislation has shown that the President continues to make improving the economic outlook one of his objectives.

Markets were also surprised by the Presidential tone of Trump’s rhetoric. Many had expected another speech akin to that delivered at his inauguration (at which Trump painted a picture of an America on the brink of disaster), or another of his frequent attacks on the press.

That Trump was able to stick to the autocue and deliver something less incendiary and divisive than at previous public appearances has reignited market hopes that the Republican is capable of moderating his behaviour.

Overall, markets remain positive on the US Dollar, but the recovering Pound still has the edge and so GBP USD is inching above opening levels.

At the time of writing the GBP EUR exchange rate was trading around 1.17, while the GBP USD exchange rate was trending in the region of 1.23.