The monthly figure for UK manufacturing growth has come in well below expectations and sterling has understandably plummeted as a result. Going into today’s session, sentiment towards the UK economy was tentative at best given last week’s first quarter GDP figure of 0.5%. Anything less than 0.5% would officially have put the UK economy back in recession.
The market would have been looking for a clean sweep of positive UK data this week, and this morning’s drastic undershoot only increases the pressure on growth elsewhere. With growth in services and construction expected to slow, risks are certainly to the downside on sterling.
The MPC will make its monthly rate statement on Thursday, and no change in the 0.5% BoE rate is anticipated. With arch-hawk Andrew Sentance set to leave the MPC this month, a BoE rate rise this summer is looking increasingly unlikely.
The ECB is also making its monthly rate decision on Thursday, and whilst the market consensus is that it will follow last month’s rate hike in June, there is a small chance it will tighten policy again this week. Eurozone inflation is well above the official target, and the ECB (unlike the BoE) has shown it is more concerned with maintaining price stability than with safeguarding economic growth. In all likelihood it will be Trichet’s press conference on Thursday that will hold focus, as the market looks for firmer indications that the ECB will raise rates again next month.
Having fallen through robust support levels against the euro at €1.12, sterling looks highly vulnerable to further losses this week. Moreover, it is difficult to pinpoint a catalyst for a sterling turnaround unless this week’s figures show some unexpected growth.
All eyes are on tomorrow morning’s UK construction figures then. Sterling is in dire need of a surprise acceleration in growth. As always, comments are welcomed.
Richard Driver
Analyst – Caxton FX
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