British Pound Left Looking Too Cheap Following Strong Construction and Manufacturing PMI Data Releases

Hammond exchange rate impact

The Pound has hit fresh multi-year lows against a host of G10 currencies despite news that the UK's manufacturing and construction sectors are expanding at their fastest pace in years while Chancellor Hammond says the Government stands ready to make fresh investments in the economy.

Pound Sterling has touched a fresh 2016 low against the Euro and the against the US Dollar as markets continue to digest news the Government is opting for a so-called 'Hard Brexit'.

A number of senior Conservative Party members have said over recent days they they are willing to sacrifice unfettered access to the European single market if the cost of doing so is achieving full sovereignty.

The declines in Sterling come despite signs the UK economy continues to grow at an admirable pace.

IHS Markit and the CIPS have reported the construction and manufacturing sectors continue to expand.

  • British Pound to Euro exchange rate today (4-10-16): 1.1437, September's best: 1.1999, the 2016 low: 1.1419
  • Euro to Pound Sterling exchange rate today: 0.8744, September's best: 0.8756

On Tuesday Construction PMI read at 52.3, well ahead of the 49 figure forecast by economists.

September’s was the fastest increase in new orders for six months for the construction sector and this is the first time activity has risen since May.

Markit and the CIPS report that the growth was driven largely by an uptick in residential building.

The construction data echoes the strong beat delivered 24 hours earlier by the Manufacturing PMI release stood at 55.4 in September, analysts had forecast a reading of 52.1.

It was reported that the domestic market remained a prime driver of new business wins, while the weaker Sterling exchange rate drove up new orders from abroad.

UK manufacturers reported improved demand from clients in Asia, Europe, the USA and certain emerging markets.

The recent rebound in the manufacturing sector encouraged companies to take on additional staff during September.

Employment rose for the second straight month, after declining throughout the earlier part of the year.

"Overall, the survey evidence for the quarter so far and hard data for July – especially the 0.4% monthly rise in the services sector from Friday’s release – suggest that GDP will expand moderately in Q3, whereas we previously expected the economy to broadly stagnate," says Scott Bowman at Capital Economics.

With the data being so strong, and the economy set to benefit in the future from the Bank of England's recent interest rate cuts, surely Sterling is looking far too cheap at current levels?

Indeed, the Bank may certainly have to leave rates unchanged in November in light of the recent data which would be a big plus for Sterling.

"If tomorrow’s services number also comes in strongly the BoE is going to have a hard time justifying another cut in interest rates. Already their August move looks premature, but it would be folly to reverse course now. Instead, they must sit out the next few months in no-mans land, constantly reiterating their ability to do more should the economy worsen," says Chris Beauchamp at IG in London.

Latest Pound/Euro Exchange Rates

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Live:

1.188▲ + 0.13%

12 Month Best:

1.3218

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1.1476 - 1.1524

**Independent Specialist

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Pound Nearing a Bottom: Forex.com

So how low can Sterling go?

Interestingly, the pair could be nearing a bottom argues analyst Fawad Razaqzada at Forex.com.

For Razaqzada most of the hurdles to a GBP stabilisation are now out of the way:

"While one could argue that it may be a bit premature to start feeling bullish on the pound again, most of the negative news is out of the way now. We had the initial Brexit vote shock, then the Bank of England’s response in the form of a rate cut and re-introduction of QE, and now we know that the Article 50 will be triggered before April next year. The markets are forward-looking and for sterling to weaken significantly further investors will be keen to find out what the next trigger might be.

"Specifically, they will be wondering if there will be any further Bank of England interest rate cuts to look forward to. On that front, the BoE’s outgoing deputy, Minouche Shafik, has recently said that it may be necessary to loosen policy further. But she’s a known dove and is leaving in February anyway. Also, if UK data continues to improve like it has over the past several months then there is no need to do that anyway."

However, technical analyst Lucy Lillicrap at AFEX argues that she is yet to be convinced Sterling is about to turn positive anytime soon, particularly against the Euro.

"An attempt has been made to re-stabilise above 1.1500 in recent days but the environment remains dominated by supply and a sell-off towards 1.1150/1.1050 is likely before support firms again," says Lillicrap.

The analyst to reduce current bear risk a swift rally back through 1.1725 is needed but looks increasingly difficult to realise.

Chancellor Hammond Unable to Tempt Sterling Higher

However, it is politics that are likely to be of most importance for Sterling with the latest declines being triggered by ongoing developments at the ruling Conservative Party conference.

UK Chancellor Philip Hammond has been unable to extend any recovery in GBP despite the news the Government would continue to invest in new housing and transport infrastructure.

The Government would no longer target fiscal consolidation plans which allows more space within which to embark on stimulus programmes where necessary.

Regarding Brexit, Hammond says the UK economy will "be better and bigger for it" going forward.

Hammond says the Conservatives will not let the UK down on Brexit, "but would not turn our backs on Europe."

"Our economic future must not be defined by Brexit alone," says Hammond.

The Chancellor said the Government would spend an extra £220 million support for tech innovation in order to smooth the transition from ground-breaking research to world-class products.

Announcements on boosting house building were also announced alongside further investments in the North and Midlands.

“With the clock now ticking on an EU exit, it’s good to see the Government set out the right chapter headings on how to boost confidence in our economy. We must now hear more on how government will work with business to build an inclusive, long-term industrial strategy. The Autumn Statement must move us several steps on to drive future investment and innovation across the country," says Carolyn Fairbairn, CBI Director-General.

Clearly though, there was simply not enough by way of detail to prompt a recovery in Sterling.

Article 50 and May’s Tough Line on Immigration

GBP is trading in the red on Monday the 3rd August with currency traders reacting to confirmation by the UK’s Prime Minister May that Article 50 of the Lisbon Treaty will be triggered before the end of March 2017 which will begin a two-year negotiation process to leave the EU.

While clarity is welcomed, it appears that traders sold GBP on May’s tough stance on the nature of negotiations.

The Government appears keen to make immigration a red line in negotiations which will likely mean the UK loses access to the European single market.

The freedom of movement of people between members of the single market is a fundamental cornerstone of the agreement.

The imposition of tariffs on UK imports by Europe, and potential loss of financial passporting, would likely have a negative impact on economic growth over coming years.

"Following Sunday’s announcement, Sterling has weakened this morning with the GBPUSD exchange falling below 1.29 as a hard Brexit becomes more likely. Long term, if the UK does follow through with a hard Brexit, Sterling has the potential to come under further pressure given the probable stalling of Foreign Direct Investment (FDI)," says Shilen Shah, Bond Strategist at Investec Wealth & Investment.

The Government also said it would introduce a Great Repeal Bill which would remove the 1972 European Communities Act and convert all existing EU legislation into UK law on the day of departure from the bloc.

“The weak Pound may provide some support to the export orientated FTSE 100. Gilt market issuance is likely to increase given the likely weaker UK GDP profile following a hard Brexit, the Bank of England’s monetary easing however should keep a lid on Gilt yields rising significantly,” says Shah.

 

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