Pound slumps as disappointing manufacturing PMI puts Q2 growth in question

The pound nosedived on Tuesday as some weak manufacturing data prompted markets to worry that the UK economy struggled at the start of the second quarter. 

Sterling remains on the back foot this morning, with GBP/EUR edging down to €1.131, GBP/CAD subdued at C$1.7468, while GBP/AUD and GBP/NZD are both sliding, falling to AU$1.8117 and NZ$1.9392 respectively. Only GBP/USD appears to be strengthening as the pairing rallies to $1.3631.

The Federal Reserve will conclude its May policy meeting later this evening, with the US dollar poised to soar if the bank hints at a more aggressive pace of monetary tightening in the coming months…

What’s been happening?

The pound tanked on Tuesday, being met by heavy losses as activity in the UK’s factory sector was shown to have slowed again in April.

According to data published by IHS Markit, the UK’s manufacturing PMI tumbled from 54.9 to 53.9 last month, striking a 17-month low.

The slowdown in the manufacturing sector placed considerable pressure on Sterling yesterday as not only does this prompt concerns over the UK’s second quarter growth prospects, but also further weakens the case for the Bank of England (BoE) to raise interest rates this month.

The GBP/EUR exchange rate fell by around half a cent yesterday in the wake of the UK’s manufacturing PMI, although a lull in Eurozone data appeared to prevent the euro from making any further gains.

Meanwhile the GBP/USD exchange rate slumped by around 1% on Tuesday as the pairing’s losses were accelerated when the US published its own manufacturing PMI figures.

While factory activity was shown to have slowed in April, with the manufacturing index sliding from 59.3 to 57.3, this still pointed to the sector expanding at a robust pace.

What’s coming up?

The pound could be set for further losses this morning as the UK publishes its latest construction PMI.

While the construction industry only accounts for a very small portion of the UK’s economic growth, the sector’s recent contraction proved to be a major drag on GDP at the start of the year, with another decline in April likely to raise further concerns over the UK’s second quarter growth.

The euro may also struggle during Wednesday’s session following the release of the Eurozone’s latest GDP results, with a run of more modest data in 2018 expected to see growth slow from 0.6% to 0.4% in the first quarter.

Meanwhile movement in the US dollar today is likely to be driven by the Federal Reserve’s latest rate decision.
While the Fed’s is not expected to make any changes to its monetary policy today, the US dollar may still tick higher if the bank’s outlook appears more hawkish in tone.