F/X weekly comment

As predicted last week, sterling went down. Yes, I know I said I thought sterling should go up, but I definitely said this means it will probably go down, and down it went. Not down the plughole yet, but definitely swirling in that direction. 400 points in a single week is a very poor performance indeed. So how did it happen?

UK PMI

2 doses of very nasty medicine. PMI stands for Purchasing Managers Index, and we have them for different sectors of the economy. This week we had figures for manufacturing and for services sectors. Purchasing managers are tasked with gauging future demand, and adjusting orders for materials accordingly. The PMI summarizes the opinions of these executives to give a picture of the future of the sector. A higher PMI indicates that materials purchases are increasing and that the economic outlook is positive. Alternately, a lower PMI means orders for materials are down and the future outlook is less favourable. By nature, the figure is very sensitive to the business cycle and tends to match growth or decline in the economy as a whole.
The services sector PMI fell to 53.8 in May, down from 54.3 in April. The service sector is by far the biggest economic sector in the UK and the fall was blamed partly on the overlap of bank holidays and partly because of subdued consumer demand.
Earlier in the week the PMI index for the manufacturing sector fell to its lowest level for 20 months. Separate data released by the Office for National Statistics (ONS) showed that construction orders fell by 23 per cent from the previous quarter and down by 18 per cent compared with the same period the previous year.
Euro
Despite all the factors listed in last week's article, and especially as eurozone debt concerns continue, the ECB’s willingness to raise interest rates is seen as positive for further increases, with the region’s largest economy Germany backing the resolution of the debt crisis and many investors taking that as a cue to support the single currency further. Eurozone inflation continues to rise, an indication to many that the Euro may benefit from further rate increases as opposed to the flat sentiment over rates coming from the Merv and his merry men.


So where from here? I have no shame at all in suggesting that you may as well toss a coin this week. I for one do not have a clue where it's going to end up this time next week. If I had to make a guess, it would be slightly higher than here, just on the yoyo effect of the markets.