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Sterling Hits New Low on Manufacturing Concerns

Sterling hit a three-week low against the euro yesterday after a UK PMI came in sharply lower than expectations, raising concerns the UK economy could struggle in the coming months.

The PMI summarizes the opinions of leading executives to give a snapshot of the future of the manufacturing sector. A higher PMI indicates that materials purchases are increasing and that the economic outlook is positive. Alternately, a lower PMI means orders for materials are down and the future outlook is less favorable.

August was expected to show a figure of 57 but when it was released it came out at 54.3 which not only is significantly below expectations and the lowest reading since last November but also very close to the contraction level of 50. If manufacturing in the UK did drop into contraction then the currency could easily slip further to negative territory.

Against the dollar the pound rose strongly, more attributed to Dollar weakness as the U.S. currency came under pressure against a range of currencies after upbeat data from China and Australia soothed worries about the health of the global economy and boosted risk appetite.

The weak data meant the pound underperformed currencies such as the euro and the Australian dollar, just managing to hold support at 1.2 GBP/EUR and 1.7 GBP/AUD but only marginally. The Euro-zone GDP figure this morning might well drop the pound out of this upward trend and back to the lower levels seen previously this year.

Reduced fears of a renewed global slowdown have sent investors into perceived riskier currencies recently with the Euro and Australian dollar benefitting most.

Analysts cautioned, however, the rally in such currencies may be short-lived as concerns about the state of the global recovery persist. They expect safe-haven currencies to remain firm after the yen hit a 15-year high last week on fears U.S. economic recovery was faltering.

“The acceleration in manufacturing activity in the U.S. and China alleviates some of the fears for a global slowdown and a double dip recession in the U.S,” said Kathy Lien, director of currency research at GFT in New York.