Pound Sterling Rallies on Services Data-Surprise THEN Slumps vs Euro, Dollar on Manufacturing Data

Industrial and manufacturing figures released a day after the Services PMI came in below expectations and quashed a nascent GBP rally.

The following live exchange rates are observed following the Bank of England interest rate decision which went by without any fireworks:

• British Pound to Euro exchange rate: 1.2024
• British Pound to US dollar: 1.2532
• British Pound to Australian dollar: 1.9231
• British Pound to Canadian dollar rate: 1.7483
• British Pound to New Zealand dollar rate: 2.1478
• British Pound to South African Rand rate: 22.7019

NB: The quotes here are representative of the mid-market; your bank will affix a spread at their discretion when transferring your money. An independent FX provider will however guarantee to undercut your bank's offer with a better rate. In some instances they are able to deliver up to 5% more FX. Please find out more.

Bank of England slides by

Sterling continued to favor its back foot and remained near mid-June lows against the greenback after the Bank of England, as expected, left its monetary policies unchanged.

No statement was issued which is the norm when bankers keep rates and QE unchanged. Circle Aug 20 on your calendar, though.

Joe Manimbo at Western Union says:

"That’s when the BOE will publish what went on behind closed doors at this week’s meeting. Should the minutes show a splintering Monetary Policy Committee with some members voting for a rate hike, sterling would stand to rally anew.

"Mixed data on Britain’s economy lately and uncertainty ahead of Scotland’s independence vote on Sept. 18 have dialed up headwinds on the pound, which has made life easier for U.S. importers. A compelling play for American businesses would be to tuck away some of the pound’s decline ahead of the BOE minutes weeks from now with Forward Contracts."

Services PMI improve the outlook for GBP

Forecasts had been turning lower through the month of July as an overbought sterling was tipped for a correction.

Indeed, the trend for the month was downwards with a further lurch lower coming on the first of August when the UK Manufacturing PMI disappointed markets. (NOT to be confused with the Industrial and Manufacturing data from the ONS released on Wednesday).

However, the Service Sector PMI came to the rescue of the pound with the strong data prompting some to speculate that the recent downtrend had bottomed.

The PMI read at 59.1, analysts had lower expectations predicting a reading of 57.9, last month read at 57.7.

Markit's Chris Williamson has commented that the data confirms the UK economy is still booming, the Bank of England will be taking note and the excuses for keeping interest rates at record lows are fast running out.

Indeed, interest rate expectations remain the key driver of exchange rates across the world at present.

Manufacturing and Industrial Production data misses the mark

The pound was hit hard on Wednesday after Industrial Production and Manufacturing production data both missed their mark with the former coming in at 0.3% vs. 0.6% eyed and later printing at 0.3% versus 0.7% forecast.

Manufacturing output slowed to only 0.2% growth on a 3 month basis versus 1.1% the period prior.

Data has been mixed of late and the takeway from the reaction in GBP is that markets are highly sensitive to data at the present moment. Expect volatility to decline now that the main events of the month have passed.

Has the pound euro and pound dollar exchange rate bottomed?

The month of July saw both the GBP/EUR and GBP/USD fall from their 2014 highs as a the GBP rally ran out of steam and profit-takers unloaded their positions.

Today's strong buying interest confirms to us that the recent downtrend may in fact be over - this kind of impetus often leads to a change in trend.

Another spell of strong economic growth

Commenting on Tuesday's impressive PMI outcome, Markit say:

"The growth surge in the UK economy shows no signs of abating. The three Markit/CIPS PMI surveys showed business activity expanding in July at the fastest rate since April.

"The sustained buoyancy of the surveys indicates the country is on course for another spell of strong economic growth in the third quarter. Gross domestic product looks set to grow by 0.8% again in the three months to September, assuming the surveys hold their current levels in coming months."

The strong pound sterling worries manufacturing, but services and construction sectors compensate

Talk of the negative impact of a stronger UK currency continues to worry UK plc, particularly the manufacturing secotr.

The GBP has risen 4% so far this year against a trade-weighted basket of currencies and has an adverse effect on exports as UK goods are priced out of the global economy.

Markit confirms that manufacturers reported the weakest rise in output for just over a year in July, which coincided with slower growth of new export orders.

"Although the manufacturing PMI showed some signs of growth cooling, as firms struggled with the strong pound and weaker demand in key export markets, the buoyancy of the services and construction sectors suggested the domestic economy clearly continued to boom in July," say Markit.