Things could heat up in today’s session for the Pound Sterling (GBP), Euro (EUR), and US Dollar (USD) exchange rates after a subdued US holiday session yesterday which left the UK’s Markit Manufacturing Purchasing Managers’ Index (PMI) as the main release of note.
The UK manufacturing sector was one of the immediate beneficiaries of the UK’s Brexit vote and the Pound’s subsequent devaluation against most major G10 currencies. However, yesterday’s PMI reading suggests that a competitive currency cannot save UK manufacturers from economic gravity.
German and UK Manufacturing Suffer
The UK’s headline PMI in manufacturing dipped to its lowest level since August 2016, two months after the Brexit vote. The decline was driven by the first outright decline in foreign demand in over 2 years, with respondents citing a slowdown in the global economy. Germany’s equivalent report, released in the same session, showed the UK was not alone. Germany’s manufacturers reported the slowest export sales growth since May 2016. Policymakers’ forecasts remain as a timely warning: the global economy is in the mature phase of the economic cycle, with economic slack spent, and should decelerate over the next two years.
Meanwhile, Turkey’s central bank asserted its independence on Monday. After an eye-watering 17.9% annual inflation reading, the central bank promised appropriate policy tightening at its September 13thmeeting. Its explicit pledge that the ‘monetary stance will be adjusted at the September’ meeting temporarily gave the Tukish Lira some reprieve however the currency still ended the session down 1.88% against the US Dollar (TRY/USD). The recent emerging market sell-off has been aggressive.
For the day ahead, the UK Markit Construction PMI will be the focus of the European morning. The construction sector unexpectedly accelerated in July. August’s release needs to prove that July’s pick-up wasn’t just construction playing catch-up from the weather setback at the start of the year.
Bank of England Testimonial Ahead – GBP Exchange Rate Tentative
Later in the session, the Bank of England’s (BoE) testimonial before the Treasury Committee will take place. Market focus will be on the timing of the next rate hike and BoE’s assessment of the economic consequences of Brexit, which will have to consider a Brexit of both the hard and soft variety, with the political outlook still unclear.
The market currently anticipates that the next full BoE rate hike will be in two years’ time. With short Sterling bets extended, this leaves plenty of room for hawkish comments to bring forward expectations and lead GBP higher. However, with the UK parliament back from summer recess, GBP will be at the mercy of political headlines in the coming months, making it difficult for GBP to sustain higher levels.
In the afternoon, US ISM Manufacturing, Markit Manufacturing and Construction Spending will set the tone ahead of Friday’s Non-farm Payrolls. Canada’s gauge of manufacturing activity will also be released.
The Pound to US Dollar (GBP/USD) exchange rate is currently trending in the region of 1.2823. The Pound to Euro (GBP/EUR) exchange rate is trading at 1.1090.