Bulls take over after strong manufacturing data
02/Feb/2012 • Currency Updates•
It was a day of two halves yesterday for the pound with disappointing data being released from the Nationwide House Price survey, showing a far lower annualised growth in prices than had been anticipated. On the upside, PMI Manufacturing survey data revealed a surprise return to growth in the UK manufacturing sector, which led to GBP climbing to a two-and-a-half month high against the dollar, although it lagged against the euro as the statistics did little to alter expectations of more monetary stimulus.
Most recent UK data, including GDP numbers, has shown the economy is on the brink of recession, raising expectations the Bank of England will step up its asset purchase programme next month to support the flagging economy. January’s manufacturing PMI eased some of those worries, but did little to change the market’s forecast of more quantitative easing by the BoE next week, even if services and construction PMI data later in the week surprise to the upside.
The euro rose against the dollar for the first time in three days as a purchasing managers’ index of manufacturing output in the region beat analysts’ estimates, adding to signs that Europe’s economy is stabilizing. The better-than-expected PMI data also helped the euro outperform the pound and added to stronger risk sentiment. The single currency rose 0.6 per cent against the dollar, as Italian and Portuguese bond yields fell from highs. In particular, Portuguese government bonds led a rally in debt issued by the eurozone’s lower-rated states yesterday, by capitalising on good results at a T-bill auction.
Traders said they saw long-term investors outside the euro zone buying Portuguese debt, but the volumes were extremely thin, indicating that broad sentiment on the junk-rated country was very fragile and could easily worsen again. Many market analysts warned the euro could run into selling at higher levels given mounting worries as Greek debt swap talks drag on. Some investors are also concerned the market will next take aim at Portugal if, as mentioned above, conditions worsen and debt restructuring talks are once again being debated.
The Dollar fell versus 13 of its 16 most-traded peers even after a healthy improvement in the US’s manufacturing sector. Expansion in manufacturing in the U.S. hit a seven-month high in January, led by gains in new orders, production and employment. The U.S. dollar lost ground against other major currencies, extending the decline from earlier this week, as the rise in risk appetite dampened the appeal of the safe-haven Greenback.
The main factor boosting the risk sentiment today is from the PMI reports globally. Markets are now pricing in a more constructive outlook for global growth in 2012, which is causing dollar weakness and stronger risk appetite.