Market Report - 01/05/2024
UK manufacturing output drops ; Markets await FOMC decision
UK manufacturing slipped back into contraction last month as output and new orders showed declines as cost pressures rise, according to figures published this morning from S&P Global.
The data provider has showed that UK manufacturing PMI dropped to 49.1 in April, down from March’s 20-month high of 50.3. Any reading below 50 shows a contraction (which is usually detrimental to the GBP), however the actual reading of 49.1 was higher than the flash reading of 48.2 which benefitted sterling.
The PMI survey has found that uncertain market conditions and client destocking hit manufacturers, who also suffered supply-chain disruption due to the Red Sea crisis. Worryingly however, new orders fell, with manufacturers reporting weaker demand from both domestic and overseas customers. New export orders have now fallen for the last 27 successive months, with reports of weaker intakes from Germany, Ireland, Asia and the US, according to S&P Global.
The Bank of England, who are due to meet next on May 9th, may be concerned that today’s PMI report shows that manufacturers lifted their selling prices last month. Output charge inflation hit an 11-month high, as factories passed on their rising costs to customers. This could well add to the current reservations of the Bank of England in terms of brining forward their rate-cut expectations.
Following expectations for ‘fewer’ rate cuts this year than previously anticipated from the Bank of England – markets makers and city investors are now calling the GBP an ‘attractive long’ candidate vs the EUR and USD. New hawkish language from the BoE could well see the pound further supported.
The call comes just days ahead of the Bank of England's policy meeting. The market is currently priced for about two 25 basis point interest rate cuts from the Bank of England in 2024, with the first happening in August.
We saw the Pound come under pressure in April when expectations for more interest rate cuts were increased. GBP/EUR and GBP/USD were subject to substantial downward movements; falling to a multi-week low to 1.1570 & 1.2360 respectively. The Pound is at risk of declining once more if the Bank of England boosts rate cut expectations once more (and goes against the current market supposition).
Moving across the pond: although it is generally anticipated that the Federal Reserve will hold interest rates at the eagerly awaited policy meeting (tonight) Wednesday, investors will closely watch Jerome Powell's press conference in order to get insights about the direction of future rate hikes. The forward guidance he gives in this speech will ultimately be more important for the outcome of USD pairs in the immediate future than the actual rate decision itself.
The chair of the central bank will probably reiterate that the Fed is not confident that inflation will continue to drop based on recent data. Tuesday's fresh data revealed that wage growth resumed at the beginning of the year and continued to accelerate beyond the pre-pandemic level.
Lastly, EUR/USD is trading sideways above 1.0650 amid a softer risk tone and broad US Dollar strength on Wednesday. With European markets closed for Labor Day, the pair awaits the US employment data and the Fed policy announcements for the next directional move.