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GBP steady ahead of manufacturing PMI data and Irish Brexit news

By Nick Parsons

It is certainly unusual not to begin the London comment by noting how much the pound has gone up overnight.

As the new month begins, the Asian session has been very quiet indeed with GBP/USD opening almost exactly where it finished in New York last night at 1.3330. This comes after a remarkable run higher which had seen it rise almost 4 cents against the US Dollar and 6 cents against the Aussie Dollar in the space of less than three weeks.

Yesterday, in our North American commentary, we wrote that, “For the moment, the GBP seems only to want to hear good news, but with September’s highs for USD/GBP within touching distance, it may soon be time to question whether the recent strong rally has gone far enough”. This comment bears repetition.

The great currency investor/speculator George Soros (like him or loathe him) coined the term “reflexivity” whereby price action itself determines the way that incoming news is viewed. If the market is falling, traders look for the bad news. In a rising market, all news is good. We’re tempted to wonder whether the GBP is currently a good example of this phenomenon?

A combination of a Eurosceptic Conservative rebellion over a £50bn Brexit divorce bill and an Ulster Unionist Party who will not accept a hard border with England and Scotland certainly has the potential to halt and reverse the recent exuberance for the British Pound. If the DUP don’t like what’s being proposed, the Coalition Government will fail: the DUP exists only to protect the Union. The clue is in its’ name.

Overnight price action in GBP suggests a degree of caution after the recent strong rally. Let’s see now how the economic data are shaping up; this morning brings the UK manufacturing PMI report for which consensus estimates are a reading of 56.5.

At the beginning of November, the Dollar’s index against a basket of major currencies stood around 94.3. During the month it traded as high as 94.8 on November 7th with a low of 92.2 on Monday 27th; a relatively narrow range of just over two points before finishing at 92.70.

Four weeks ago, the Dollar was being driven higher by hopes of tax cuts, a Budget boost to infrastructure investment and a stock market which stood at an all-time high.

Here we are on this first day of December, with the Budget still not passed but equity markets which are even higher still; the S+P 500 has added 75 points in the space of just over 20 trading days. Interest rate expectations have barely shifted over this period.

A 25bp rate hike on December 14th still looks a done deal barring any external shock, whilst incoming Fed Chair Jerome Powell seems unlikely to deviate from the monetary policy path set out by his predecessor. What has changed a little is the economic and political outlook elsewhere in the world.

The UK seems to have made some progress with Brexit negotiations whilst the European economy is growing at its fastest past in almost 20 years. As all currencies are relative prices, the adjustment to this incoming news flow has made the GBP and EUR a little more attractive than they previously were.

With year-end in sight, we’ll see if all that post-Election US optimism was completely wrong or whether the Dollar can stage a comeback.


The EUR has certainly had an up and down week. As well as the twists and turns of the German coalition talks, there has been conflicting data on inflation to absorb.

On Wednesday the EUR rose due to higher German CPI. On Thursday morning European time it fell due to softer Eurozone CPI (driven largely by Italy) and just as it seemed likely to test the recent range low around USD1.1825, it promptly surged almost a full cent before ending the month at 1.1900; a net gain of around 250 pips from Halloween’s USD1.1650 close.

Against the British Pound – and despite the GBP’s sharp rally of the last few days – the EUR also ended November higher than it began; albeit only marginally. GBP/EUR edged down from 1.1400 to 1.1360.

Today brings all the individual Eurozone country PMI data. These tend not to have the same potential for surprise as elsewhere in the world because so-called “flash estimates” are produced for the two biggest economies and the Eurozone itself around 10 days earlier.

Recall that these estimates showed output growing at its fastest pace in 17 years. France and Germany together are estimated to comprise around 53% of Markit’s Eurozone total so there is still some scope for surprise, especially as these two countries’ data may also be revised. Consensus for the figures at 0900GMT is for manufacturing PMI of 60.0.

The Aussie Dollar had a pretty poor November as it became increasingly clear the RBA was in no rush to raise interest rates against a background of pretty soft growth in wages and a generally benign picture on inflation.

The poor price action became somewhat self-reinforcing and on Thursday the AUD couldn’t rally even with a pretty solid set of Q3 capex numbers. It ended the month at USD0.7565 and GBP/AUD1.7880.

Overnight we’ve had an update on Australia’s manufacturing sector. AiG’s PMI jumped 6.2 points in November to 57.3 and the index has now held above 50 for 14 consecutive months, the longest continuous expansion since 2005.

All seven activity sub-indexes expanded in November, including very strong results for new orders and exports, two lead indicators that bode well on the outlook for activity levels in early 2018. By sector, the performance was not quite as spectacular with only five of eight industries expanding over the month.

The report noted, ““Participants said demand from residential construction was tailing off in November. Other participants noted stronger demand for equipment, machinery and other inputs or Government projects and procurement, agriculture, renewable energy projects and the local leisure market.”

AUD has pretty much flat-lined after the numbers, which itself is much-improved price action after a difficult month. Now let’s get on with the serious business of the second Ashes test starting tomorrow in Adelaide.

The Canadian Dollar has been all about oil this week. In talks which seemed to go on until the last minute, both OPEC and non-OPEC producers led by Russia finally agreed on Thursday to extend oil output cuts until the end of 2018 as they try to finish clearing a global glut of crude while signalling a possible early exit from the deal if the market overheats.

Kuwaiti Oil Minister Essam al-Marzouq told reporters the Organization of the Petroleum Exporting Countries and non-OPEC allies had agreed to extend the cuts by nine months until the end of 2018, as largely anticipated by the market. OPEC also decided to cap the combined output of Nigeria and Libya at 2017 levels below 2.8 million bpd. Both countries have been exempt from cuts due to unrest and lower-than-normal production.

Oil traders were initially unimpressed by the agreement and NYMEX crude fell from a European high of $57.92 to a low of $57.05. Overnight it has rallied to $57.62, dragging the CAD higher with it. USD/CAD is down 20 pips at 1.2875 with GBP/CAD at 1.7405.

Thankfully for those driven to tears by the sheer tedium of following OPEC and a near 1:1 correlation with the currency, the focus now shifts to Canadian economic data with Q3 GDP and the October employment reports released later today.

After Thursday’s extremely weak business outlook report which sent the NZD sharply lower, there was some hope that the Q3 terms of trade numbers this morning might bring some respite.

For those readers who didn’t have to suffer the joys of learning Economics, “terms of trade” measure the purchasing power of exports relative to imports. An increase is a good thing: it effectively raises domestic incomes.

Overnight we saw that New Zealand's terms of trade hit a new record in the September quarter as cheaper petrol imports offset lower export prices, which have been buoyed by strong butter prices in recent months.

The ToT increased 0.7 percent in the three months ended September 30, its fourth quarterly gain, beating the previous high set in July 1973, Statistics New Zealand said. Export prices fell 1.9 percent in the quarter, while import prices dropped 2.6 percent.

A pretty good set of numbers all round has failed to give the Kiwi Dollar any lasting support. NZD/USD jumped from 0.6820 to nearly 0.6840 but has since given back nearly all these gains to open in London at 0.6825. GBP/NZD is at 1.9820; its highest in almost 18 months.