Manufacturing Data Beats Expectations, British Pound Edges Higher Against the Dollar and Euro

Modified: Tuesday, 01 August 2017 12:41 BST

The Pound to Euro exchange rate today: 1 GBP = 1.1174 EUR, up 0.3%
Pound to Dollar exchange rate today: 1 GBP = 1.3208 USD, 1.1194, up 0.05%

Sterling has caught a bid against the Euro and US Dollar on the back of a fresh set of UK economic data which confirms UK economic activity continues to accelerate from its soft start to the year.

The UK’s manufacturing sector continues along a path of growth according to fresh data amidst a welcome and perhaps long-overdue uptick in export activity.

IHS Markit and the CIPS report that their Manufacturing PMI survey reveals an acceleration in activity in the sector with a reading of 55.1 being reported for July, up on the previous month’s 54.2 and ahead of economist forecasts for 54.4.

The headline PMI was boosted by stronger inflows of new work, higher levels of production, improved job creation, longer supplier delivery times and a slight increase in inventory holdings.

Above: Sterling rallies against the US Dollar at 09:30 when UK Manufacturing data is released.

"This morning’s UK manufacturing PMI survey gave the Pound another boost, following a sharp rise into a 10-month high against the Dollar yesterday. Particular encouragement will be drawn from the strong export performance, with the continued decline in the value of the pound, relative to the euro, making UK producers increasingly competitive within our greatest export market," says Joshua Mahony, an analyst with IG.

The data corroborates the findings of other surveys which also point to an uptick in activity for the sector with the CBI reporting in their latest industrial trends survey that production among UK manufacturers grew at the fastest pace since January 1995 in the three months to July.

Scott Bowman, UK Economist at Capital Economics says the three-month average of the survey’s output balance is consistent, on the basis of past form, with a quarterly gain in manufacturing output of almost 1% is well above the 0.5% contraction reported in the first estimate of Q2 GDP.

Of interest, the Manufacturing PMI report shows exports are picking up as the soft Pound combines with an increase in global business activity to stimulate demand for UK-produced goods.

The report notes a significant boost from the trend in new export business, as foreign demand rose at the second-strongest rate in the series history, beaten only by that recorded in April 2010.

Companies reported improved inflows of new work from clients in North America, Europe, the AsiaPacific region and the Middle-East. The domestic market also remained a positive contributor to order books, although not to as great an extent as signalled earlier in the year.

“The manufacturing sector remained on terra firma this month, with a sustained rise in new orders, overall activity, new jobs, and with strong optimism to boot,” says Duncan Brock, Director of Customer Relationships at the CIPS.

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Eurozone Economy Continues to Grow

There was also good news for the Euro, however.

Eurozone economic statistics showed growth of 0.6% quarter-on-quarter driven by a mixture of resillient domestic demand and firming export activity.

Analysts note that data published in the last couple of days show that solid and broad-based GDP growth is finally starting to be accompanied by early signs of life in core inflation, which, if confirmed, would indicate that macro numbers look increasingly on track.

"This strengthens the case for an ECB tapering announcement in autumn," says Marco Valli, Head of Macro Research at UniCredit Bank in Milan.

The promise of a tapering of the ECB's extraordinary monetary stimulus plan has driven the Euro higher through the course of 2017, but there are risks.

Valli also warns that the rising Euro could be its own worst enemy as the ECB will be monitoring financial conditions and a rising Euro might place downward pressure on both growth and inflation as the cost of imports falls.

In trade-weighted terms, the euro is up by about 2% since Draghi’s speech in Sintra, and by about 4% relative to the technical assumptions used for the June ECB forecasts.

There is a chance the ECB could delay the tapering call if the Euro's upward rally does not fade and currency traders betting on a stronger single-currency might be disappointed.