British Pound Catches a Bid on Manufacturing Data, Gains on Euro and Dollar

Pound Sterling was seen edging higher off morning lows following the release of manufacturing figures from IHS Markit and the CIPS.

The monthly manufacturing PMI release came in at 56.7, ahead of the 56.5 forecast by economists which represents a beat on expectations that would typically be assumed as a positive for the currency.

IHS Markit report the UK manufacturing sector remained resilient in May, sustaining most of the growth momentum gained during the prior survey month.

The Pound to Euro exchange rate was seen trading at 1.1467 following the release, up from a low at 1.1430.

The Pound to Dollar exchange rate was seen trading at 1.2874, up from a low of 1.2840.

Manufacturing production and new orders both expanded at above survey average rates. Companies benefited most from the continued strength of the domestic market.

Analyst Lisa Lignos at RBC Capital Markets says the numbers “make the Q1 slowdown seem potentially transitory.” She is referencing the slow first-quarter GDP data reported by the ONS.

However RBC Capital are not optimistic on Sterling's ability to maintain any strength in the current environment of political uncertainty and are maintaining a “tactical long” EUR/GBP bet that targets a rise in the exchange rate to 0.8850.

This is the equivalent of a fall to 1.1299 in GBP to EUR terms.

The strong data does point to the risks that some in the analyst community are too negative on the economy, and thus Sterling.

Of course we have the threat of an anti-business Corbyn government being installed in office in a week’s time, but for now the ongoing expansion of the manufacturing sector has had a positive impact on both business sentiment and job creation.

Optimism regarding the outlook for production levels in one year’s time improved to a 20-month high, with 56% of manufacturers forecasting output to rise during the next 12 months.

“The domestic market persisted as the driving force, but the weak pound’s continuing bounty meant levels of export orders also increased, for the thirteenth month, as export markets made use of the competitiveness of UK firms,” says Duncan Brook, Director of Customer Relations at the CIPS.

Another risk to this outperformance in manufacturing are Brexit negotiations which are due to start this month.