Pound Boosted by Construction & Manufacturing PMI, Export Data Improves
- Written by: Gary Howes
The British pound has advanced on global foreign exchange markets thanks to some strong economic data being released at the end of the week.
Markit and the CIPS have on the 2nd of October that their Construction PMI (Sep) read at 59.9, markets and analysts had priced the pound sterling exchange rate complex for a lower reading of 57.5.
As a result of the positive surprise currency markets are buying up sterling to re-rate the currency's value.
Bank of England rate-setters will observe that 'slack' in the construction sector is tightening at a rapid rate i.e. full employment conditions are being reached:
“Construction firms enjoyed a strong finish to the third quarter of 2015, as a sustained rebound in new development projects continued to have an impact on the ground. Moreover, September data suggests that the UK construction sector is still experiencing its most intense cycle of job hiring for at least 15 years, and consequently skill shortages remain a dominant concern across the industry."
Markit and the CIPS announced on the 1st of October that their Manufacturing PMI reading came in at 51.5, ahead of the 51.3 forecast by analysts.
When watching currencies what matters is how expectations are met - in this case we have a positive surprise and sterling has moved higher against its two main partners - the euro and US dollar.
Latest Pound/Euro Exchange Rates
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The biggest positive out of the PMI data was that new export orders rose to expansionary territory for the first time since March (+1.3pp) and the output index improved marginally to 53.2 (+0.2pp), touching a six-month high.
Sterling exchange rates were already on the move higher following the release of data 24 hours earlier that showed the UK Current Account deficit was at -16.8BN, as opposed to the more pessimistic forecast for -24BN.
The current account shows how the UK is trading with the rest of the world with a deficit signifying we are importing more than we are exporting.
The improvement in the deficit came thanks to an increase in UK exports - something that was certainly unexpected if we consider the strength of sterling and the potentially negative impact it is potentially having on exporters.
According to the ONS, “the trade deficit narrowed to £3.5 billion in Quarter 2 (April to June) 2015, from £10.5 billion in Quarter 1 (Jan to Mar) 2015. This was primarily due to a narrowing in the trade in goods deficit as exports rose by £4.5 billion and imports fell by £3.2 billion.”
At the present time the pound to euro exchange rate conversion is seen trading higher at 1.3578, higher than the 1.3525 seen 24 hours earlier.
The pound to dollar exchange rate conversion is seen at 1.5146.
Sterling "found good support at 1.5100 after the publication of the manufacturing PMI which was unchanged against expectations of a small dip. This release was rather important, as the BoE takes into account the downside effects on growth and inflation of a strong exchange rate, even though it acknowledges that such effects may be blander now than in the pre-crisis years," says foreign exchange researcher Asmara Jamaleh at Intesa Sanpaolo.
According to Jamaleh, barring major disappointments from upcoming domestic data, the pound should in any case find strong support in the GBP/USD 1.50 area and climb back from these levels already in the short term.
GDP Data Confirms UK Economic Growth Remains Firm
Reacting to the GDP data Dennis de Jong, managing director at UFX.com says while the outlook remains positive for the economy the data may not be enough to convince the Bank of England to start raising interest rates:
"No surprises for Bank of England governor Mark Carney, as GDP figures continue on their slow and steady upward trend.
"The good news is that GDP revisions show the UK has done better than originally thought in emerging from the economic crisis.
"However, that won’t be at the front of Carney’s thinking, as volatility from across the Atlantic and in emerging markets continues to stem the possibility of significant positive growth in the short term."
