The pound has risen against the dollar, as July has been the best month for Sterling in more than a decade, partly due to the dollar’s weakness. On Friday, the pound was at its highest level in almost five months. Positive news on Monday, also offered support to the pound which was also the best performing major currency of the past week, a result of better than expected economic data, global stock market recovery and expectations for a Brexit trade deal being agreed by October.
On Monday, the release of manufacturing PMI for July showed that the UK’s manufacturing sector continued its rebound in the wake of the coronavirus pandemic, with new orders growing at the fastest pace since late 2018.
UK Factory Output
UK factories increased production at the fastest rate in nearly three years in July, as plants reopened after the Covid-19 lockdown. The headline manufacturing PMI from IHS Markit and CIPS rose to 53.3 in July in the final reading, the highest reading since March 2019. The flash estimate was 53.6 and June’s 50.1. The output component was up at 59.3, the highest since November 2017. PMIs are an indicator of private sector activity and are given on a scale of 1 to 100. Anything above 50 signals growth, while anything below means contraction.
Signs of an economic recovery improved manufacturers’ sentiment, with confidence rising to its highest since March 2018. 62% of companies are now expecting production to be higher in 2021 and only 12% of firms are predicting a contraction. Sentiment strengthened across the consumer, intermediate and investment goods industries.
In terms of manufacturing employment, job cuts were linked to redundancies, natural wastage and aligning capacity with current manufacturing needs. Purchasing activity was increased but supply-chain disruption continued.
Will pound remain steady this week? Thursday’s BoE policy meeting
The main event for Sterling this week will be Thursday's Bank of England policy meeting. At the June meeting, the BOE’s monetary policy committee kept the Bank rate at 0.1% but added £100bn into the economy by increasing its quantitative easing (QE) programme to £745bn. At the meeting on Thursday, it is expected that interest rates will be kept unchanged and markets will be watching for any signals as to whether quantitative easing will be expanded.
If the Monetary Policy Committee is optimistic about the economic outlook, Sterling could be supported. Asmara Jamaleh, Economist at Intesa Sanpaolo said: "Expectations are for unchanged rates and QE, although a potential display of openness to further monetary stimulus soon should weaken the pound, especially if the negative rate option is mentioned. An expansion of QE would have a smaller impact.”
Philip Shaw, chief economist at Investec, says:
“Our expectation is that the votes on both the policy rate and QE will be unanimous in favour of ‘no change’. But we expect the speed of gilt buying to be reined back further. The Bank of England is due to announce the reverse gilt auction sizes beyond 6 August and has hinted that the programme will run more or less to the end of the year. This suggests a weekly gilt purchase rate somewhere close to £4bn per week in order to meet the total £745bn target at that point. In trying to gauge the policy stance further ahead, we expect the committee to note that the economy has enjoyed further recovery momentum recently ... Welcome though this is, it of course reflects the response to the gradual unwinding of the lockdown. What is more critical is how the economy looks towards the end of the year as, for example, the CJRS (furlough scheme) expires. Moreover members will also note the signs of higher coronavirus infection rates on Continental Europe, in the US and to an extent the UK. The MPC’s assessment of the current indicators will probably be one of guarded optimism, but tempered strongly by the risks facing the economy further ahead. We think there is a strong chance that the committee sanctions a further £75bn- £100bn of QE in November.”
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