This article looks at the strength of the pound (GBP) from the latest fundamental data release. We are in the first 3 days of June and have already witnessed a number of important economic releases such as the services, manufacturing and construction PMI by Markit.
All these 3 indicators provide a pretty comprehensive look at the condition of the UK economy in May from a supply perspective. It will also influence the Bank of England meeting from which the Monetary Policy Committee (MPC) will release a statement tomorrow on June 4.
Services, Manufacturing and Construction Overview of U.K. Economy
The Services sector comprises 78% of the UK GDP and is the prime driver of growth. On this account, we will start with the Services PMI. The good news is that the Services PMI is still growing strongly with a reading of 56.5, which is greater than the 55.5 longer trend reading. The bad news is that this is lower than the 59.5 reading in April and the market's expectations of 59.2.
The uncertainty over the May 7 Parliamentary elections resulted in reduced services demand. On a bigger picture note, this is the 29th consecutive Services expansion (reading above 50.0) and employers are expanding their payrolls on increased backlogs. Post election, the uncertainty of Brexit is also likely to weigh on the demand for services.
As for Construction, the post election rush encouraged consumption of housing and this resulted in the highest confidence level since February 2006.
Residential and civil engineering construction led the Construction recovery post election and in order to deal with the increased demand, employers are increasing their staffing levels. The reading of 55.9 for May came in way above expectations of 55.1 and was much better the reading of 54.2 for April.
Lastly, Manufacturing rose to 52.0 in May from 51.8 in April but came in under expectations of 52.7. In short, it is a lackluster reading where manufacturing is supported by better demand at home as overseas demand wanes.
The May reading of 52.0 was just barely above the long run average of 51.5. UK manufacturing grew for 27 consecutive months and its employment growth grew for 25 consecutive months in May. However the growth in employment had slowed significantly. This has nothing to do with the UK election and represents the consequence of a stronger GBP and weaker investment spending.
Of all 3 data points, it is the Manufacturing PMI that points to a possible slowdown in the UK economy, which may deter the BoE from being too bullish in its assessment of the economy. The services PMI weakness was due to the transitory weakness of the UK election but the reverse can be said for the Construction PMI. Still at 78% of the economy, a services slowdown can have a fatal impact on the UK economy that would require monitoring to see if it will recover in June. That said, businesses have expressed their reservations over Brexit given that the EU is the main export market for the UK.
Hence I would be slightly pessimistic on the CurrencyShares British Pound Sterling Trust ETF (NYSEARCA:FXB) given the uncertainty. It is likely that the BoE would defer rising rates towards the third quarter of the year.
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