Resurgent pound bounces higher as manufacturing productivity figures impress
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Sterling performed strongly at the end of last week as traders were impressed with better-than-expected manufacturing figures, as well as the sturdy credit figures from the day before. All this took place against a backdrop of weaker data from the Eurozone and renewed fears over a trade war breaking out after the US government slapped hefty tariffs on metals imports from a number of big economic players, including China and the EU. Thursday’s strong data from the Eurozone and US failed to suppress GBP against EUR and USD, but economic weakness and risk worries elsewhere allowed it to clock up gains against other majors. Sterling is mostly flat this morning, with one exception. GBP/EUR is virtually unmoved.
What’s been happening? Markets had already priced in the risk premium associated with the ousting of Spanish Prime Minister Mariano Rajoy, so when it happened on Friday afternoon the effect on EUR exchange rates was limited. At the same time, news that Italy’s two biggest parties, the Five Star Movement and League, had managed to agree on a coalition eased market worries about another possible Italian election. That said, any positive sentiment towards EUR was cancelled out by an underwhelming set of PMIs across the bloc. Further woe came in the form of hefty US large tariffs being imposed on EU exports of aluminium and steel, which drew a strong response from critics who questioned why the US was targeting ‘allies’ in its protectionist measures. These EUR negatives allowed Sterling to rise, translating into a 0.6% gain by the end of Friday trade. On the US front, a strong set of employment and labour market figures did not translate into increased demand for USD, with USD/EUR only rising slightly on the news. Non-farm payroll figures shot up far beyond expectations to 223k, against forecasts of 188k and smashing the previous month’s 159k. In other news, the pound shot up by 0.8% against the New Zealand dollar as investors continued to flee NZD on risk sentiment grounds. There were also general market worries that the New Zealand economy was demonstrating signs of weakness. The pound also did well against the Australian dollar, rising by 0.5% on Friday on a general lack of data from the Australian economy, and surging risk aversion on trade war fears. This morning, however, the pound has fallen back against the Australian Dollar as a solid set of economic stats, including higher-than-expected company gross operating profits and an uptick in retail sales, bolstered the currency.
What’s coming up? Looking ahead, the pound is likely to react to this morning’s PMI construction figures, which are forecast to show a slight fall from 52.5 in April to 52.0 in May. Tonight’s like-for-like retail sales are also expected to show a fall of 0.8%, although this would be an improvement on the previous figure’s fall of 4.2%.