TRADERS´ Blogs

It was the pound that fared the worst yesterday as the dollar was subject to month end demand.  After the modest selling pressure during the early part of today’s session, sterling has taken a beating on the latest manufacturing PMI data.  The data recorded a much weaker than expected 45.9 headline reading, from 50.2 in April.  This is a 3 year low, with the details showing news orders falling at the fastest pace for over 3 years (March 2009).  The other point to note is the fall in domestic orders outpacing that of export orders, so it can’t simply be blamed on events in the eurozone.  The employment balance also recorded job losses for the first time in five months. 

Of course, the pound has managed to rise above events in the eurozone to a degree, as shown in the price action on EUR/GBP, which dipped below the 0.80 level once again towards the end of May.  But whilst the record lows on UK yields reflect the fact that it’s not the eurozone (10 year now yielding 1.50%), it’s also the case that it is very much intertwined with events across the channel, not only through the export channel (around half going to the eurozone), but also via the banking sector.  Today’s data make more QE likely, but markets would be right to question the impact of this on both Gilt yields (which are heading lower anyway) and also the wider economy, with the lending numbers earlier in the week showing rising rates (e.g. mortgage rates at 1 year high) and falling credit as households pay down debt. That said, if the weakness seen today is reflected in the services data and other readings through the month (the Bank places strong emphasis on survey data), the Bank will struggle to sit on the sidelines and do nothing.