Sterling gains on Manufacturing Data; GBP/USD 11 week high

2nd February 2011

Good morning. Well, yesterday was a mixed day for Sterling. Strong manufacturing data strengthened the pound to an 11 week high against the US Dollar. Poor housing data kept gains in check though. At 08:30am rates are as follows:

  • GBP/EUR 1.1697
  • GBP/USD 1.6186
  • GBP/AUD 1.5984
  • GBP/NZD 2.0727
  • GBP/CAD 1.5989
  • GBP/CHF 1.5117
  • GBP/ZAR 11.472
  • GBP/NOK 9.2173
  • GBP/JPY 131.81
  • EUR/USD 1.3834

Manufacturing Data boosts Sterling

Data released yesterday showed the manufacturing Purchasing Managers Index (PMI) climbed to 62.0 in January from an upwardly revised 58.7 in December. That was the highest reading since the survey began in 1992 and well above the consensus forecast of 57.9. The better figures showed that the recovery in the UK is largely being driven by the manufacturing sector.

Sales overseas helped by a weaker pound has given this sector a lift recently. Against the US Dollar we are now close to a 3 month high. Against the Euro however gains were limited, as interest rate expectations both here and in the EU kept the Euro stronger than the US Dollar.

So does this mean an interest rate hike in the UK?

The figures suggest the manufacturing sector continues to enjoy strong growth even as economic activity elsewhere remains subdued. Some economists said the data increased the likelihood of a rise in interest rates in the near future.

Ross Walker of RBS, said the PMI brought forward the risk of a rate rise “sooner rather than later”. It is this expectation of higher rates that is giving Sterling a lift. Why? Higher interest rates mean a higher return for investors. This drives investment into the UK, and with it creates a demand for Sterling. When something is in demand, it’s value increases and this is what we are seeing at the moment.

However, gains may be limited as some analysts think speculation for a rate rise in the first half of the year was excessive, given manufacturings relatively small contribution to UK GDP. The fragile state of the housing sector and a weak outlook for consumer credit were also nagging on investors’ minds.

Attention now moves to construction and services PMI data due on Wednesday and Thursday respectively after both sectors contracted in December.

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