Sterling moves higher on impressive Manufacturing PMI data

Week Commencing Monday 3rd January 2017

 

UK: GDP on the up despite Brexit, have we really had our cake and eaten it!

The UK economy grew slightly faster than previously forecasts in the first three months following the European Union membership referendum, figures released by the ONS stated on Friday.

According to the statistics agency, the UK’s Gross Domestic Product grew by 0.6 percent on a quarterly basis in the three months to the end of September, slightly ahead of the 0.5 percent forecast.

Meanwhile, the year on year reading showed the UK economy expanded 2.2 percent in the third quarter, down from the 2.3 percent reading recorded in the corresponding period in the previous year, which had remained unchanged in last month's report. These figures fly somewhat in the face of “doom-mongers”, however it is widely believed that 2017 will be a tougher year for the UK economy.

Consumer fundamentals are forecast to drop markedly over the period and business uncertainly surrounding the Brexit negotiations should impact both investment and hiring. One thing is certain however, 2017 will be an interesting year for the economy and the country.

EUROZONE: Manufacturing blasts to new highs for 2017!

Eurozone manufacturing sectors appear to be in good shape moving into 2017, with HIS Markit’s final 2016 numbers registering the combined economies at 54.9.

Equity markets jumped on the news, which signalled the best result for the beleaguered zone since April 2011.

Germany´s DAX 30 index rose 0.8 percent in midmorning trading, while the CAC 40 in Paris added 0.2 percent. Manufacturing in the Netherlands and Austria were also at 68-month highs, with France close behind at a 67-month high. In another encouraging sign for France, which has been suffering from high unemployment, job creation was at its fastest rate since June 2011.

This may well be unwelcome news to UK importers, whom were enjoying a slight rest bite from the collapse in Sterling versus the Euro. Should the good news continue, we expect the Euro to continue to find more solid ground moving deeper into 2017.

 

FX Forecast

EUR/USD remained in its range over the Christmas/new Year period, with 1.0351 providing the key level of Euro support. Moving deeper into the week, should this level be breached we expect rates to continue to travel towards parity. CPI and the FOMC are key to this, and a bullish FOMC could see this level breached sooner rather than later.

GBP/USD temporarily dropped below 1.22 before reconsolidating above during the festive period. Should the recovery continue, we expect to see some Sterling resistance at the 1.2509 psychological and pivot levels, while 1.20 provides a solid downside barrier. Brexit and Geo-politics remain key drivers and are the events to watch.

GBP/EUR continues to seek director, trading as low at 1.1580 and as high at 1.1980. We expect this mixed trading to continue as markets grapple with solid UK data versus obvious Brexit risks.

 

Economic Calander for the Week

UK Data:

In the UK all eyes will be on the PMI releases this week, with Manufacturing kicking off the pack. We expect manufacturing to increase in the month, with the potential for the release to push through 55. Construction PMI on Wednesday is also expected to increase, albeit marginally from 52.8 to 53.0.

Finally, the all important Services PMI should drop slightly from 55.2 to 54.7. All in all, a mixed bag for the UK is expected this week.

US Data:

We have a busy week for the US with ISM Manufacturing PMI kick starting things off. We expect manufacturing to increase slightly on the month from 53.2 to 53.6.

Moving to Wednesday, markets will be watching for the FOMC minutes which should provide some insight into the rate decision last month. Hawkish sentiment will be greeted well by Dollar markets, and should continue to support the Greenback.

Thursday’s Nonfarms should show a slight decline in hiring from 216k to 170k, and the unemployment rate could rise from 4.6 percent to 4.7 percent on the back.

EU Data:

We have a light week for the Euro with CPI the only release of note. We expect European inflation to post at 1 percent versus last months 0.6 percent print. This should provide the Euro with some ammunition, given the usual policy response to rising inflation.

Outside the economic calendar, traders will remain focused on European Geo-politics, with the French and German elections and polling key drivers.

 

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