The Pound lost out against the Canadian Dollar, the Australian Dollar and the New Zealand Dollar yesterday as some weaker-than-expected US Manufacturing data was taken to reduce the probability that the Federal Reserve will begin to taper its asset purchasing programme during June.
Sterling began the day on the front foot as UK Manufacturing rose to a 14-month high of 51.3, which added fuel to the British economic engine in the second quarter. UK GDP in Q2 is likely to receive a sizeable boost from Manufacturing as April’s Manufacturing result was also upwardly revised, from 49.8 to 50.2.
Whilst the Manufacturing Industry, which accounts for around 10% of UK output, stagnated during the first three months of 2013, the British economy still managed to muster up growth of 0.3%, suggesting that economic growth could continue to accelerate in the first half of the year. Rob Dobson from Markit Economics, who compiled the report said:
“One of the most positive features of the expansion is its broad base, with producers of consumer, intermediate and investment goods all reporting stronger growth”.
The stronger-than-expected figure was also interpreted as positive for the Pound because it reduces the chances of another bout of quantitative easing from the Bank of England.
However, Sterling was unable to maintain its gains against the commodity bloc during the afternoon as the US ISM Manufacturing report printed at a disastrous 49.0. The leading indicator of Manufacturing activity in the United States was forecast to hold steady at 50.7, the level it reached in April, but the surprisingly soft score left investors reevaluating their bets of an early exit strategy from the Federal Reserve.
The Pound to US Dollar exchange rate (GBP/USD) hit a 3-week high of 1.5376 in response to the 4-year low ISM result. However, Sterling was not so lucky against the risk correlated currencies and the Pound fell -0.7 cents against the Canadian Dollar (GBP/CAD). The ‘Loonie’ was also helped by an 11-month high domestic Manufacturing PMI result. Sterling lost out on a cent against the Australian Dollar (GBP/AUD) and in the immediate aftermath of the game-changing ecostat the Pound retreated by -2.2 cents from a 4.5-month high against the New Zealand Dollar (GBP/NZD).
The ISM report was especially good for risk appetite because it featured a decline in the Employment section, which some investors took as a precursor to a weak Non-farm Payrolls report on Friday. This week’s headline labour market figure could prove crucial in the near-term future of riskier asset classes such as the Canadian and Antipodean currencies. A soft set of NFP’s could force the Federal Reserve to scale back the date of its first QE3 reduction, which would carry the potential to significantly boost risk sentiment. Conversely, a robust Non-farm report could massively expand support for the world’s premier reserve currency and leave the commodity currencies in the dark.
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