Another choppy week for Pound Sterling saw the UK currency hit by economic worries as market focus returned to the latest data following the recent triggering of Article 50 and the official beginning of Brexit.
Overall, the pound saw a notable drop in the first two days of the week after Markit PMI results for March showed a slowdown in sectoral activity.
Monday’s manufacturing index was anticipated to rise from 54.5 to 55, but instead weakened to 54.2.
Tuesday’s construction index continued the trend, declining to 52.2 from 52.5 instead of edging down to 52.4.
On a trade-weighted basis, the Pound fell from 77.55 to 77.31 across the two days, dropping over a eurocent against the Euro to 1.16 and over a cent against the US Dollar to 1.24 by Wednesday.
The midweek services PMI marginally helped Sterling to largely recover overall.
Traders were braced for disappointment after the weak performance of the other two indices, but the services PMI surprised to the upside, climbing to 55 instead of from 53.3 to 53.5.
A better-than-expected services score more-than counterbalanced the weakness in manufacturing and construction, pushing the composite index up to 54.9; a hold at February’s score of 53.8 had been predicted.
This initially lifted the Pound, but the realisation that a complete quarter of PMIs still signalled a noticeable GDP slowdown in the first three months of 2017 kept GBP soft.
Analysts noted that the surveys indicated first-quarter GDP of 0.4%, while Duncan Brock of the Chartered Institute of Procurement & Supply (CIPS) warned that consumer prices were likely to feel the bite of weakened Sterling further, commenting;
‘With input cost inflation still close to February’s eight and a half year peak, higher prices are likely to trickle further down the supply chain to consumers. Businesses will stop absorbing additional costs for basics such as energy and food, to remain profitable.’
Today’s data has further soured appetite for the Pound, with trade and production figures for February significantly disappointing forecasts.
The trade deficit was expected to widen to -£3.2 billion, but instead climbed to -£3.66 billion; not only that, but January’s deficit was revised higher from -£1.97 billion to -£2.98 billion.
Industrial and manufacturing production both declined on the month, falling respectively by -0.7% and by -0.1%.
The decline marks the second consecutive month of contraction.
Year-on-year industrial production growth slowed from 3.3% to 2.8% instead of rising to 3.7% as predicted, while manufacturing accelerated from 2.6% to 3.3% against forecasts of a rise to 3.9%.
Construction output declined -1.7% on the month against expectations of 0.1% growth, taking year-on-year output down from 2.3% to 0.5%.
While most of today’s data has already been released, important developments still remain on the economic calendar.
An upcoming speech by Bank of England (BoE) Governor Mark Carney could see markets repricing Sterling on changing odds of monetary policy adjustments, depending upon whether the Governor is dovish or hawkish.
Since the referendum, Carney has resisted the idea that strong inflation necessitates the need to tighten policy, arguing that the underlying economic fundamentals do not support a hike.
Considering the PMIs this week have indicated a slowdown, the Governor is unlikely to change this view, even if there are greater signs businesses are getting ready to pass rising costs onto the consumer.
This afternoon will see NIESR release its GDP estimate for March, which will further add to the economic picture of the first quarter of 2017 and could therefore cement the idea that GDP will have weakened.
At the time of writing, the Pound Euro exchange rate was trading around 1.17, while the Pound US Dollar exchange rate was trending in the region of 1.24.
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