Sterling slumps due to unclear path

Yesterday’s markets

23rd September 2015

  • CHF Trade Balance: 2.87B
  • UK Public Sector Net Borrowing: 11.3B
  • UK MPC Member Shafik Speaks
  • US FOMC Member Lockhart Speaks
  • CNY Caixin Flash Manufacturing PMI: 47.0

Sterling fell across the board on Tuesday as both data and news made the path forward slightly cloudy for the once Sterling bulls.  British manufacturing declined in the three months to September for the first time since early 2013, adding to signs of a slowdown in the country's economy, The Confederation of  British Industry went on to say that total orders and export orders deteriorated with demand from abroad falling back to its lowest level in six months, whilst the expectations for output over the next three months were the weakest since October 2013. In addition,  the UK had the highest August budget deficit for three years as the tax take from individuals and companies dropped. The figures nonetheless cast doubt over whether Chancellor of the Exchequer George Osborne can meet his target of cutting 3.7 percent of gross domestic product, in the fiscal that began in April.

Late in the day Sterling fell further as Prime Minister David Cameron was said to have accepted demands from his own lawmakers that the Conservative Party remain neutral in the referendum on whether to quit the European Union. It was previously thought that the Tories would be leaning more towards a pro Europe stance. Sterling’s decline is the largest in close to four weeks. The weakening data from the UK is starting to put doubts amongst the rate hawks that Q1 is a viable date for a hike and steers down a slightly less clear path.

Meanwhile, the US Dollar continued its impressive recovery from the disappointment of the FOMC meeting last week. The Dollar continued to gain momentum from the weekend and  was near the strongest level in almost two weeks against the Euro after Federal Reserve officials said the U.S. economy is strong enough to withstand an interest-rate increase this year. Over the weekend, three policy makers separately explained their rationale for enacting a rate increase at one of the Fed’s two remaining meetings of 2015. Atlanta Fed President Lockhart spoke on both Monday and Tuesday reiterating this point. He stated that it is not a big risk to delay “lift off” by a meeting or two.

Overnight the Chinese manufacturing sector was once again under the microscope. Manufacturing activity contracted and hit a six-and-a-half year low, showing the latest sign of a slowdown in the world’s second-biggest economy. Uncertainty about the extent of China’s slowdown has been on the radar and was one of the reasons cited by the Federal Reserve for not raising interest rates last week. The figure highlights the headwinds China is facing and indicates that the recovery will be slow. 

Today’s markets

22nd September 2015

  • French Flash Manufacturing PMI
  • German Flash Manufacturing PMI
  • CAD Core Retail Sales m/m
  • ECB President Draghi Speaks
  • US Crude Oil Inventories
  • NZD Trade Balance

Looking to the day ahead we see manufacturing data continue to remain under the spotlight. The flash PMI manufacturing data is set for release from Germany, the Eurozone and the US. Meanwhile,  ECB President Mario Draghi is due to testify on monetary policy before the European Parliament's Economic and Monetary Committee. Any further hints that the QE program could be extend will result in a weaker Euro. In addition, BOE Deputy Governor Ben Broadbent and Federal Reserve Bank of Atlanta President Dennis Lockhart are due to speak at separate events.