Supply chains are the weakest link
A preliminary reading of January’s UK manufacturing PMI fell to 52.9, well below the consensus forecast of 57.3. The services-sector PMI contracted sharply to an 8-month low of 38.8, down from 49.4 and well below the forecasted 49.9 and the composite PMI also fell to 8-month lows. Supply-chain difficulties hit the manufacturing sector and the underlying performance was weaker than the headline figures would suggest. The services sector was undermined by coronavirus restrictions adding to expectations that Q1 GDP figures will show a contraction.
The Pound dropped following the data and concerns remain for underlying economic weakness, especially in light of the speculation that coronavirus restrictions would be extended and more delays before reopening schools. Further fiscal stresses are almost certain and the Bank of England will face pressure to act. Sterling continued to benefit from optimism surrounding the vaccine rollout and a modest dip in new positive cases. The pound initially dipped to lows below 1.3650 against the Dollar but recovered to around 1.3680. The Euro peaked at 1.1210 before retreating above the 1.1235 level.
Risk appetite is firm this morning as Sterling opens near 1.3700 on the Dollar and 1.1270 against the Euro.
The US manufacturing PMI index strengthened to 59.1 for January from 57.1 the previous month and above consensus forecasts of 56.5 while, more impressively, the services sector index strengthened to 57.5 from 54.8 and well above market expectations of 53.6 for the month despite coronavirus restrictions.
Existing home sales also beat expectations with an increase to 6.76mn from 6.71mn previously, maintaining housing-sector strength.
The dollar was unable to gain significant support as potential support from stronger than expected data was offset by a dip in defensive demand. The US currency secured some relief against commodity currencies.
According to flash data, the German manufacturing PMI index retreated to 57.0 for January from 58.3 and below expectations of 57.5 while the services index was marginally lower at 46.8, but above market expectations. The Euro-zone PMI manufacturing index declined slightly to 54.7 from 55.2 with the services sector index slightly above expectations at 45.0 from 46.4 previously.
The recovery in the Euro will likely gather steam if a forward-looking German data beats estimates, overshadowing bearish macro factors. The German IFO expectations released by the CESifo Group is an early indicator of current conditions and business expectations for the next six months. A big beat on expectations would indicate continued recovery amid the resurgent coronavirus concerns and strengthen the tone around the single currency.
The coronavirus pandemic is showing no signs of slowing down however. What’s more, the Italy-German 10-year bond yield spread is rising and could have a bearing on the Euro. These factors could dent risk sentiment, strengthening the haven demand for the anti-risk US Dollar.
As of writing, the Euro currently trades just over the 1.2175 mark against its US counterpart.
Data to watch
16:15 – EUR – ECB President Lagrade Speaks