Construction PMI Gives Pound a Lift
The pound sterling has reacted positively to the second major data release of the new month.
Markit and the CIPS reported that their Construction PMI series read at 58.1, markets had priced sterling lower on expectations for a reading of 56.5.
The data confirms the construction industry remains on a solid footing and GDP forecasts for a strong 2015 remain on target as a result.
All this is supportive for the local currency with pound sterling coming in higher across the board with the only losses being seen against the euro - understandable if we consider the impact Greece is having on the currency at the present time.
The construction figure follows the Manufacturing PMI release a day earlier which read at 51.4 for the month of June, currency markets had priced the British pound higher in anticipation of a reading at 52.4 and we subsequently saw declines.
Losses were shallow though; while the headline figure was disappointing there were some positives for markets to take note of.
Indeed, employment levels in UK manufacturing accelerated slightly from May’s near two-year low.
The increase in staffing levels was broad-based, with capacity expanding at SMEs and large-sized producers and across the consumer, intermediate and investment goods sectors. Part of the increase in employment reflected efforts to clear backlogs of work.
“Manufacturing delivered a sluggish but steady set of results this month compared to more upbeat activity at the start of year, but still remained on terra firma. Supported by domestic demand, purchasing managers reported gentler inflows of new orders and continuing business, as interest from export markets had lost much of its energy,” says David Noble, Group Chief Executive Officer at the Chartered Institute of Procurement& Supply.
High Pound Exchange Rates Could be to Blame
The slowdown in manfuacturing is being blamed by some on the strength of the pound / euro exchange rate.
Daniel Vernazza, Lead UK Economist at UniCredit Research cites the following anecdotal evidence from UK manufacturers for the slowdown:
(1) Sterling’s appreciation, particularly against the euro, has more than offset some better news in Europe, resulting in lower external demand and a squeeze in margins; and (2) The knock-on effects from slowing activity in the oil and gas sector on UK manufacturers in the supply chain. Overtime, as the headwind from sterling’s appreciation fades, UniCredit expect manufacturing output to pick-up, but only very gradually.
“Therefore, economic activity will likely remain lopsided towards the services sector throughout the remainder of 2015,” says Vernazza.
The last of the PMI series comes on Friday with the release of the more important Services PMI; with the services sector account for over 70% of the UK economy you can see why it is much-watched.
Those watching the GBP-USD should be aware that Thursday sees the release of the key US Non-Farm payroll release - a strong reading here could put the US dollar on the front-foot as we enter the weekend.
