The British pound dipped on Tuesday after the manufacturing purchasing managers' index (PMI) released by Markit Economics fell to 55.3 from a revised 56.2 and disappointed market expectations for a reading of 56.7.
The lower reading marks an eight-month low and signals a cooling of manufacturing growth from the peaks scaled towards the end of last year. The report pointed out that PMI still remains well above its long-run average of 51.4 as manufacturing employment increased for an 11th consecutive month, but that the trend in new export orders weakened.
According to Rob Dobson, Senior Economist at Markit, the more than one full index point below expectations is likely to disappoint markets, but it is important to remember that this is in the context of the super-strong, near-record growth rates seen in the second half of last year.
"Growth is merely hot rather than scorching, and the take home messages from the March survey are that the recovery remains solid and continues to drive strong job creation," Dobson said. "Even with the slower pace of expansion, the goods-producing sector is on couse to provide a further boost to the overall economy in the first quarter, for which we expect the economy to growth by at least 0.7%."
The data caused the British pound to turn from nearly a three-week high at around $1.6676 and dip below $1.6650. Nonetheless, technical analysts have been holding a bullish bias towards the currency and as analysts at Lloyds Bank pointed out, GBP
would remain well supported unless there was a sharp dip in the PMI number.
GBP/USD to reach February highs, EUR/GBP pressured to the downside
GBP/USD broke above 1.6660 on Monday, driven by other factors rather than anything GBP specific, said analysts at Lloyds. These experts pointed to a initial strength of EUR/USD and subsequently Janet Yellen's dovish comments that inspired more general softness of the USD and risk positive tone in market, as the main reasons behind recent GBP/USD strength.
Nonetheless, the cross presents a short-term bullish scenario that could carry it towards the 1.6822-February high. According to Karen Jones, technical analyst at Commerzbank, GBP/USD has rallied towards, and is starting to erode the 1.6667 mid-January high and at this point "we must allow for an extension to February high".
Lloyds stressed that the UK PMI would be the primary focus and barring a sharp dip in the manufacturing index, GBP should remain well supported across the board.
The EUR/GBP rejected levels near 0.83 yesterday, and Lloyds believes this now looks a good selling area on reasonable UK data, even if Eurozone data is also encouraging. 0.8245 is initial support. Admittedly, as Karen Jones noted, "the rebound from the 61.8% retracement at 0.8250 may be already over." She also highlighted that rallies are indicated to terminate circa 0.8305/15 "for an immediate downside bias to remain."