Pound Rises as UK PMI Surprises
Manufacturing output in the United Kingdom increased steadily in September 2017. Business activity was strongest in Humber, Wales, and Yorkshire. While productivity increased across the country, there were only modest increases in Northeast England and Scotland. The UK’s job creation rate slowed, indicating tepid hiring activity in and around London.
Disposable income levels across the UK are steadily falling, as increasing inflation eats into household income. On October 10, manufacturing production data year-on-year was announced: the forecast was 2.1% growth and the actual figure came in at 2.8%. Business confidence remains low, but the Manufacturing PMI is significantly above the 50 level at 55.90, indicating a bullish perspective on the UK economy.
Manufacturing Output Rises
Manufacturing output is one of the most important barometers of the economy, and comprises 70% of aggregate production. Manufacturing production includes transport equipment, tobacco, food and drink, basic metals, repair and manufacturing, pharmaceutical products and preparations, rubber and plastic, et al. Steady increases in overall business activity last month helped to raise the business activity index to 56.2 in Wales where it was last recorded at 54.1.
This marks the highest reading in 6 months. Despite Brexit pressures, the PMI data remains upbeat. Economic expansion continues in the United Kingdom, as evidenced by increased production capacity across the country. Modest growth was evident in the Northeast at 51.9, and in Scotland at 52.2. UK companies are also increasing their hiring of new employees, as demand continues to grow.
Inflation and Real Wage Growth
Inflation remains a bugbear in the UK, as GBP weakness increases the costs of imports. Businesses have responded to this by raising prices on products and services, contributing to inflationary pressures. However, the GBP posted gains on Tuesday after the release of UK Manufacturing PMI. The cable reached 1.3194, (0.5% +), despite the trade deficit widening to £14.2 billion.
Sterling’s recent moves mark a sudden reversal in the fortunes of the GBP, as concerns grew about Prime Minister Theresa May’s tenure as head of government. For all intents and purposes, the UK economy is holding up well in these troubled times. Ongoing negotiations between the UK and the EU have been fruitless, with no agreement on central issues. Across the Atlantic, it appears the Fed FOMC will only move to hike interest rates in December, for the last time in 2017. This may drag the cable lower as traders flock to purchase USD.
Strongest and Weakest Performing Areas of the UK
During Q3 2017, overall business activity in the United Kingdom rose sharply. Regional growth was strongest in several key areas including Yorkshire, Humber and Wales, with encouraging signs for many UK companies. One point of contention remains the UK inflation rate. As costs continue to rise, consumers are bearing the brunt of these price pressures.
Unfortunately, the real purchasing power of the GBP is being eroded and with no interest rate hikes in the offing, inflation continues unabated. The strongest performing areas in terms of PMI business activity in the UK include the Northwest, the East, the Southeast, London, the Northeast, England, Wales, and Northern Ireland. The weakest performing areas include Yorks, East Midlands, West Midlands, and the Southwest.
Do you feel that the GBP/USD pair can hold above 1.30 in the long-term? How will a Fed rate hike impact your trading activity with the cable and other currency pairs?
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.