The GBPEUR exchange rate has finally found some recovery strength after spending a full week stuck near the 1.15 level. The pound trades 0.26% higher at midday on Tuesday and will look to secure this bounce into the Bank of England interest rate meeting on Thursday.
GBPEUR has resistance above 1.16 and a move beyond that level would target the 1.18 yearly highs from early-April.
PMI Beats expectations
Britain’s manufacturing activity saw its fastest pace of growth in nearly 27 years in April, despite supply chain delays and raw materials shortages.
The IHS Markit Purchasing Managers’ Index (PMI) rose to 60.9 for the month and this beat analysts’ expectations of 60.7% for the highest reading since 1997. New orders also rose at the quickest pace since November 2013, while 60% of businesses surveyed expect production to be higher a year from now. Part of the gains in the index were driven by longer delivery times and rising materials costs.
HIS said of the numbers: “The sector remained beset by supply-chain delays and input shortages … which contributed to increased purchasing costs and record selling price inflation”.
The recent Suez canal blockage will be a factor in the shortages as it also affected Chinese factory orders and PMIs. Disruptions have hit the price of shipping costs and led to shortages of key components such as microchips. The PMI numbers from Europe yesterday were also good with Italy being a bright spot, but France slowed on the same supply chain issue. The European numbers were mostly lower than expectations.
Bank of England on Thursday could move the pair
The Pound will now look to build on this bounce into Thursday when the Bank of England’s Monetary Policy Committee will announce their latest interest rate monetary policy.
The bank will undoubtedly keep its rate unchanged at 0.10%, but the questions will be around tapering of the bond purchases made by the bank during the height of the pandemic.
Markets have priced in around 50bp of rate hikes by the end of 2024 after the BoE’s February forecasts. The UK has since seen upgrades from the IMF and last week from Goldman Sachs, who both saw growth at 6.3-7%. That was well ahead of the 5% predicted by the BoE, but the bank will likely lowball their expectations to allow them space to stay at the current ultra-low interest rate level.
The BoE will likely focus more on employment than growth and the ongoing furlough is masking the real damage to the workforce. There has been a boost to the services sector with the reopening and this could filter into hiring through the summer months.
Britain’s economy slumped by nearly 10% in 2020, which was the worst performance in 300 years. A sharp rebound this year is expected but it may be 2022 before the UK sees it pre-virus levels.
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