Photographer: Miles Willis/Bloomberg

Pound Halts Eight-Day Advance as U.K. PMI Falls Below Forecast

  • Manufacturing PMI slowdown raises doubts on U.K. economy
  • Ten-year gilt yield drops from highest level since February

The pound fell for the first time in nine days versus the dollar after U.K. manufacturing expanded at a slower pace in June than forecast, raising doubts about the outlook for the economy.

Sterling weakened against all except one of its major peers after data showed IHS Markit’s Purchasing Managers Index for manufacturing dropped to 54.3 last month from a revised 56.3 in May. A reading above the 50 level indicates expansion, but the slowdown signals that Brexit-related uncertainty was affecting companies and households. U.K. government bonds pared declines, with the benchmark 10-year yield having climbed earlier to its highest level since February.

  • GBP/USD falls 0.5% to 1.2966; support seen at 1.2946, June 30 low 
  • The PMI data “seem to confirm that that activity is softening, albeit that headline index remains good,” says Stuart Bennett, head of Group-of-10 currency strategy at Banco Santander SA. “It is therefore, potentially, countering the apparent BOE ‘hawks,’ at least to a certain extent. Sterling may give away some of the recent strength”
    • “Support may depend on a softer dollar rather than a stronger pound. Plus, a firmer euro could also weigh on sterling”
  • The pound reached a one-month high against the dollar last week and gilt yields rose after increasingly hawkish rhetoric from Bank of England policy makers which culminated last week in Governor Mark Carney saying that “some removal of monetary policy is likely to become necessary” 
  • Analysts at Commonwealth Bank of Australia say they remain neutral on the pound, which will likely end the year at $1.30 due to a “modest depreciation” in the dollar and “a slight narrowing in the U.K’s large current-account deficit” 
  • Yet “negative U.K.-U.S. interest rate differentials and further Brexit-related capital outflows will keep GBP/USD heavy,” they wrote in a client note Monday.
  • Despite the recent hawkish tone from the BOE, analysts at Goldman Sachs and HSBC remain bearish on the pound, with HSBC predicting it will drop to $1.20 by year-end
  • Ten-year gilt yield +2bps to 1.28%; touched 1.31% earlier, highest since Feb. 16
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