Sterling boosted by uptick in manufacturing activity

With the US and Canada enjoying the Labour Day holiday, it was up to the UK and Europe to do all the running on the markets, but despite best efforts we didn’t really get very far. In the race versus the pound, the euro, yen and Canadian dollars were largely unchanged, the dollar lost 30 cents and the Aussie and Kiwi dollars came in last place, losing a cent apiece and, no doubt, blaming their inferior running blades. With the media’s attention on the traditional autumn game of musical chairs known as a Cabinet reshuffle, the markets were left to focus on the Purchasing Managers’ Index data for August. China released their figure on Saturday showing contraction – hence the negative impact on the commodity currencies while the situation in Europe turned out to be even worse than the preliminary data showed. However, it was the UK that streaked ahead as manufacturing activity improved by more than expected, hence sterling’s relative outperformance. The news was likely a welcome relief to Mr Osborne who looks to have clung on to his job for a little longer despite being roundly booed in the Olympic stadium last night. 

The pace of contraction in Britain's manufacturing sector eased by more than expected in August as domestic clients placed more orders. Although the result remains in negative territory, indicating contraction, it was only just below the all important 50.00 equilibrium level, jumping to a four-month high of 49.5 in August from a downwardly revised 45.2 in July. A stagnation in new orders was a marked improvement from the slump seen in the prior month, with the orders index jumping to 49.9 from the 41.8 in July - the biggest one-month gain in the survey's history. However, one sunny weekend doesn’t (or at least shouldn’t) make a summer, so the markets will await further supporting data before getting too carried away. Nonetheless, with no opposition from across the pond, sterling rose to a near two-week high against the dollar and gilt futures fell after the data.

Across the Channel the eurozone PMI data showed that Europe’s manufacturing sector contracted faster than previously thought last month, despite factories cutting prices, as core countries failed to provide any support. The Europe wide PMI reading was revised lower to 45.1 from the preliminary reading of 45.3 estimated last week. The index, which stood at 44 in July, has held for 13 months below 50, indicating contraction. European manufacturers are unsurprisingly feeling the impact of the sovereign-debt crisis and tougher austerity measures that have undermined export and consumer demand. Despite this, the euro was able to hold its ground in the hope that the European Central Bank (ECB) will finally unveil the magic bullet when it meets on Thursday.

Overnight the Reserve Bank of Australia left their interest rate on hold as was widely expected and earlier this morning, Spanish unemployment rose by more than 38,000 piling on the pressure in Madrid as the bail-out standoff continues. The main events for today will be UK construction PMI and the US manufacturing PMI. Overnight AUD GDP and tomorrow Service sector PMI data from around the world. Nonetheless, significant currency movements remain unlikely ahead of the ECB meeting on Thursday and the US non-farm payrolls on Friday. Have a good day.