July 1st 2011: Preview – PMI trends critical for Sterling outlook
The UK PMI manufacturing index on Friday is the first of three key indices to be released with construction and services-sector data due next week ahead of the Bank of England interest rate decision on Thursday. These releases will have an extremely important impact on Sterling sentiment as the UK enters a critical phase in the economic and political cycle. A monthly improvement in the PMI data would provide immediate relief for Sterling, but the currency remains a strong sell on rallies given underlying UK weakness. If the PMI index weakens to below 50 for the first time since October 2009, then Sterling will be in for another very rough ride. Rapid reactions may be quick enough to catch the move with the 1.5910 area for GBP/USD likely to come under immediate pressure.
The last three manufacturing PMI releases have been much weaker than expected with a decline to a 20-month low of 52.1 in the June survey and the consensus is for the index to be little changed this month. The immediate impact of the manufacturing releases on monetary policy may actually be rather limited with the Bank of England looking to hold interest rates steady. There will, however, be a very important impact on sentiment. This is a pivotal period for the economy and government, especially given the wave of public-sector strikes and criticism of fiscal policies. Any further setbacks for the economy would herald a Summer of crisis for the government and UK markets.
Rising exports will be critical for the UK economy if there is to be a sustainable recovery, especially as the consumer will remain under heavy pressure over the next few months. If there is further evidence of the manufacturing sector deteriorating, then overall confidence in the UK economy will be severely damaged. There is also a much higher possibility that the government’s economic policies will start to unravel and Sterling could quickly enter crisis mode with heavy selling pressure.
There is little doubt that consumer spending has come under downward pressure over the past few weeks as real incomes are squeezed badly. The spate of corporate collapses in the High Street is strong evidence that spending levels are not strong enough for the weakest members to survive.
The industrial production figures released in June were horrible with a 1.7% drop for the month, but the CBI data has been more optimistic surrounding the sector. The most likely scenario is that official figure have been distorted by holidays and specific areas of weakness ain the car sector while other sector have performed well. There has, however, also been a slowdown across the global manufacturing sector and this will have a negative impact on the UK. Given these mixed influences, the most likely outcome does look to be for relative stability this month.
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