- British Pound to Euro exchange rate today: 1.1773, week's best: 1.1835
- Pound to Dollar exchange rate today: 1.2260, week's best: 1.2347
Pound Sterling has struggled over the course of the new year with the only real area of progress coming against the Euro.
Even here though gains have been pared back.
Yes, our forecast targets laid out ahead of the new week were hit, but recall that they were modest because we believed there was likely to be more of a sideways bias with an upward skew for this currency pair.
This still appears to be the case with the hammer candle formed at the end of last week proving its predictive powers.
From here we look for GBP/EUR to remain supported by the buying interest that is found in abundance at ~1.17.
Any strength is likely to remain limited.
Indeed, proof of these limits were shown on January 4 when Sterling recorded a near-1% advance against the Euro following the release of an impressive UK manufacturing PMI reading.
However, the Pound soon staged a retreat back to familiar levels.
"Sterling lost ground/returned some of its gains against the Euro. The UK ambassador with the EU leaving his post might have triggered some renewed Brexit caution," says analyst Piet Lammens at KBC Markets in Brussels via a note to clients seen by Pound Sterling Live.
Ivan Rogers, Britain's envoy to the EU, told staff on Tuesday that he would step down from his post early but did not explain his reasons for resigning.
While Rogers' resignation is not material it does play negative for a currency like Sterling that is heavily dependent on sentiment at present.
Don't Bet Against Sterling as the Economy is Still Growing
Because sentiment is such an important driver at present we would not be surprised if current Sterling weakness is limited.
Indeed, the underlying mood-music concerning the UK economy is supportive.
The Purchasing Managers’ Index is one of the most closely watched economic indicators on the UK calendar as they give the most timely and accurate indication of economic activity and are therefore relevant to direction in Pound Sterling.
The first of the series - manufacturing PMI - smashed expectations by reading at 56.1 - a 30-month high.
Analysts were forecasting a reading of just 53.3.
"Rates of growth for production and new orders in December were among the best seen over the past two-and-a-half years," says a statement released by IHS Markit and the CIPS.
The impact of a weaker Sterling is certainly continuing to play a positive role for UK industry with it being reported that new export business rose for the seventh successive month in December.
British companies reported increased levels of new work from the USA, Europe, China, Middle East, India and other Asian markets.
"This growth in new order inflows was the strongest in two-and-a-half years. In response, employment levels gathered pace at the fastest rate for 14 months, where SMEs saw the biggest rises in staffing," says David Noble, Group CEO at the CIPS.
The data, while strong, has failed to boost Sterling's performance against a rampant US Dollar which has started 2017 in fine form.
The Dollar is clearly in the driving seat on global forex markets with expectations running high that incoming President Trump will pursue a Dollar-friendly Reagan-esque policy agenda.
Expectations for the Dollar to dominate in 2017 therefore remains a theme markets are buying into.
Fiona Cincotta, Market analyst at City Index tells Pound Sterling Live that the stronger-than-expected reading for UK manufacturing could give Sterling some support against the rampaging Dollar:
"A break above $1.2300 could open the doors to $1.2335, whereas on the flip slide a move below $1.2270/60 could drag GBP/USD back towards $1.2225."
Despite the strong data not everyone is optimistic on the economy's prospects.
"In 2017 the overall UK economy, however, is expected to be dominated by slowing growth in households' real incomes, as nominal income growth is unlikely to keep up with rising inflation caused by the sharp slide in the GBP. As a result, we expect the economy to weaken during 2017 as consumers will not be able to raise spending much further," says Johnny Bo Jakobsen at Nordea Markets.
Is this as good as it gets for UK manufacturers then? Maybe. But there is certainly a sense that the dire warnings made in the wake of the Brexit vote are unlikely to transpire.
"Brexit still actually hasn’t happened yet, so come the second quarter of this year, once Article 50 has been triggered, we could be looking at a more depressing picture, but unlikely to be the Armageddon that was forecast," says Cincotta.
Ahead: Watch Services PMI on Thursday
On Wednesday we get the release of Construction PMI data which is forecast to read at 53, up from the previous month’s 52.8.
Services PMI on Thursday is forecast to read at 54.7, lower than the previous month’s 55.2.
Expect any notable moves in the UK currency to come off the back of the services sector reading as this sector accounts for above 80% of the UK economy.