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“Made in Britain” still going strong

“Made in Britain” still going strong

Sterling benefited from another welcome boost via Markit Manufacturing PMI yesterday which exceeded both September’s performance and the market consensus by some margin. The published data showed us that the manufacturing sector grew to 55.5 in October, thus stemming some of the fears that the UK economy has completely run out of steam for the year.

The biggest price action for the day, however, came from Sterling versus the Australian Dollar (GBP/AUD). The pair dropped sharply following the Reserve Bank of Australia’s (RBA) decision to keep the interest rate unchanged and indicating that low inflation will provide room for a future rate cut. This in turn sent market participants flocking into the Aussie Dollar’s direction and the currency firmed up by over 0.7% versus the Pound.

Euro manufacturing PMI across the Eurozone rose to 52.3 in October, from 52.0 in the preceding month. Although the markets had expected the reading to remain unchanged, it made little difference versus the Dollar and was totally overshadowed by Sterling manufacturing released 30 minutes later, producing the day’s high of 1.4063.

In the latest move to stabilise the Greek economy, Greece’s four big banks have this week to finalise plans to raise the EUR14.4bn shortfall identified by the European Central Bank (ECB). They will then have until the end of the year to raise the money. This is an important step in the bailout plan, and each of the four banks should manage to raise their share by year-end.

Mario Draghi, the ECB President, will be speaking later today. Market participants will be looking for any indication of the likeliness of further stimulus in December and how this will be delivered. Possibilities include extending the end date past September 2016, expanding the size of quantitative easing (QE) purchases and/or further reducing the deposit rate.

The US manufacturing sector rose at its slowest pace in more than two years in October, underlining US factories’ struggle with a sluggish global economy and strong US Dollar. The ISM manufacturing PMI fell to 50.1 last month, from 50.2 in September, falling for a fourth consecutive month. The strong Greenback has hurt exports and caused the number of manufacturing jobs to drop by 8% in October, reaching the lowest level since August 2009. Manufacturers reported that prices of raw materials declined for the 12th successive month.

However, the index for new orders climbed to 52.9, up from 50.1, adding to hopes that the slowdown may end in the coming months. Whilst manufacturing activity has grown for 34 months in a row, the pace of growth has slowed for four straight months. In contrast, Markit’s final survey showed manufacturing activity across the US rose in October and hit the highest level in seven months.

Nevertheless, EURUSD has settled around 1.10 point as the markets seemed to have priced in the recent Federal Reserve and European Central Bank policy meetings. Now that a potential extension to QE and a possible rate hike have been factored in, the markets are going to have to see strong data figures to provide direction. Non-Farm Payrolls figure out at the end of the week will be key as always.

Data to watch: 09.30am UK PMI Construction (Oct), 3pm US Factory Orders (MoM) (Sep) and 7pm Euro Mario Draghi speech.

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