Weak UK Manufacturing PMI to Prompt More QE from Bank of England?

EUR Breaks 1.30 as Systemic Risk Return
USD: Dollar Rallies as Sequester Kicks In
CAD: Growth Slows Ahead of Bank of Canada Meeting
AUD: RBA to Leave Rates Unchanged Next Week but watch Comments
NZD: To Take its Cue from AUD Next Week
USD/JPY Quietly Edges Higher

Lloyds Business Barometer survey for February was published overnight. This showed that companies’ own business prospects fell by 14 points, to a four-month low of 32%, after rising in each of the previous three months. Sentiment about broader economic prospects also fell on the month, albeit only slightly. These results may well reflect somewhat disappointing economic news over recent weeks, including weaker than expected Q4 GDP figures in the UK, US and euro area, and line up with last Friday’s soft UK manufacturing PMI print. Nonetheless, the results are still consistent with the economy returning to positive, albeit weak, growth in the current quarter.

PMI construction data for February are also published today. Over recent months the PMI has stabilised at a little below 50, which points to a modest contraction in sectoral output. However, the official figures indicate a much more severe fall in activity of around 10% last year.

The euro area finance ministers meet today where the main discussions are likely centre on the conditions attached to the aid package for Cyprus, although no final agreement is expected. The ministers are also likely to discuss the recent economic forecasts from the European Commission.

The European Central Bank meets next week and some economists are looking for easier monetary policy. Unlike last month, the central bank’s comfort with the level of the euro is not question. Since the last meeting in February, the EUR/USD has dropped more than 4% in value from 1.3575 to a low of 1.2967. A weaker currency provides support for the region’s economy, limiting the need for additional stimulus. However there are some economists looking for the central bank to cut interest rates by 25bp and/or offer new LTROs which would compound the losses in the euro. It’s a tough call because German economic data continues to surprise to the upside.

The USD continued strong on Friday helped by a much stronger than expected ISM manufacturing data and the comparison with weak numbers in the UK and Eurozone. However, Lloyds TSB are sceptical that the large difference between US and European manufacturing PMIs will persist.

The first day of trading in March has kicked off with a bang as many currency pairs broke key support and resistance levels. For the first time in December, the EUR/USD is poised for a close below 1.30. The GBP/USD also tested the 1.50 level and USD/CHF hit 3 month highs. Eurozone economic data was actually quite good with German retail sales jumping 3.1% in the month of January and Eurozone manufacturing PMI revised up slightly to 47.9 from 47.8. Unfortunately economic data matters little when systemic risk has returned.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The author(s) cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

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