Sterling hits seven week high as fears of UK recession abate

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6 September 2016

Written by
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The Pound rallied to its strongest position against the US Dollar in seven weeks on Monday, with another impressive PMI for August calming concerns that this summer’s Brexit vote could lead to an outright recession in the UK for the first time since 2009.

T
he UK’s dominant services industry, which accounts for around 80% of overall output in the domestic economy, rebounded strongly by the most in two decades following a dire result in July. The heavily scrutinised index rose remarkably sharply to 52.9 from its seven year low of 47.4 , effectively returning the sector to pre-referendum levels.

Yesterday’s much improved data will be welcome news to the Bank of England and follows last week’s impressive manufacturing and construction PMIs, which both recovered well after a significant slump post-Brexit vote. We think these surprisingly strong numbers suggest that the UK economy is on course to avoid recession in 2016, despite what many onlookers had initially feared.

In Europe, the Euro remained on the back foot as markets opened for the week. Another slightly underwhelming Eurozone services PMI will no doubt pile further pressure on the European Central Bank to increase its economic stimulus programme at its highly anticipated meeting on Thursday. While we do not expect any major policy changes this week, we think that we’ll see a clear hint that further action could be on its way later in the year.

Yesterday we also had another clear indication that the Bank of Japan is ready to increase its stimulus measures after BoJ Governor Haruhiko Kuroda claimed that there was ‘ample room for further monetary easing’.

Major currencies in detail:

GBP

Sterling soared to its highest level since mid-July on Monday, before retreating during afternoon trading to end the session just 0.1% higher against the Dollar.

Yesterday’s services PMI added to the growing optimism that July’s slump in UK activity could prove just a one-off, with data firm Markit suggesting that Britain’s economy is unlikely to contract in the third quarter. We now expect a near flat reading in GDP growth in the three months to September.

Next up for Sterling will be Wednesday morning’s manufacturing and industrial production figures, both of which will, for the first time, incorporate the post-Brexit impact.

Governor of the Bank of England Mark Carney will also be facing a barrage of questions when he testifies to lawmakers at the inflation report hearings on Wednesday.

EUR

The Euro remained stuck comfortably below the 1.12 level yesterday, ending 0.2% lower against the Greenback following another weak set of economic data.

Monday’s services PMI proved a minor disappointment, falling just short of economists’ expectations. The index fell to 52.8 in August from 53.1, with a particularly poor performance in Germany offsetting better than expected readings in France, Italy and Spain.

By contrast, Eurozone retail sales picked up in July, posting the largest increase of the year despite June’s Brexit vote. Sales rose 1.1% in the month, largely due to an increase in spending on fuel in the Euro-area.

Revised second quarter growth figures in the Eurozone this morning are expected to remain unchanged and unlikely to draw too much attention among Euro traders given their datedness. Thursday’s ECB meeting will draw much more focus this week

USD

The US Dollar index ended the London trading session 0.2% higher on Monday amid a very quiet day in the US.

There were no major announcements out of the US economy on Monday, with markets closed across the pond due to the Labor Day bank holiday. The Dollar remained fairly well supported, having held its own despite Friday’s weaker than expected US payrolls report.

Normal service will be resumed in the US today, with a number of major economic releases that could shift the US Dollar this afternoon. The non-manufacturing PMI from ISM is expected to show another robust print, while Fed member John Williams could offer his take on the possibility of a Fed interest rate hike this year.

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