Senior analyst at Hargreaves Lansdown Laith Khalaf says: “The sharp improvement in sentiment does cast some doubt over whether the Bank of England needed to cut interest rates at the beginning of August, though this is a bit of a chicken and egg situation”.
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Sterling jumped 1 percent against the dollar and hit a one-month high against the euro on Thursday after data showing the British manufacturing sector staged one of its sharpest rebounds on record in August.
The bounce came as the closely-watched Markit/CIPS purchasing managers index for the United Kingdom manufacturing sector climbed to 53.3 in August, rebounding from a 41-month low of 48.3 hit in July.
The update caused sterling to jump 0.8% against the United States dollar, breaking through the 1.32 barrier to reach 1.324 dollars.
“Greater output requirements led some manufacturers to hire additional workers in August, but the overall rate of job creation remained marginal as the vast majority of firms left workforce numbers unchanged”, it added.
Investec’s headline purchasing managers’ index (PMI) rose from 50.2 to 51.7 in August, staying above the 50 line that separates growth from contraction. However, it is Friday’s slew of data, including the Non-Farm Payrolls number, which is likely to be far more decisive for the dollar.
Next week, another PMI survey, of the much larger services sector, will provide another snapshot of the state of the United Kingdom economy.
Paul Hollingsworth, UK economist at Capital Economics, said the figures added to evidence that the manufacturing sector “is getting over the initial shock of the referendum outcome”.
The EEF trade body, which represents manufacturers, said the strength may not be sustained.
According to the latest Markit Purchasing Managers Index, UK manufacturing climbed to its fastest rate in 10 months following a decline after the European Union referendum. Any upbeat data, especially on the job market, will be closely watched by the Federal Reserve as it could push the USA central bank closer to raising interest rates.
“There are growing indications that the true impact of higher uncertainty following the referendum will instead bleed in over time, rather than showing up conspicuously in one or two quarters”, J.P. Morgan economist Allan Monks said.
The value of the pound has jumped after new data that revealed the manufacturing sector bounced back strongly in August, reducing fears of an imminent recession. Factories reported that they increased output by the highest amount since January.
“Weak domestic and export demand, coupled with the 2016 year-end period closing in, further contributes to the possibility of weak activity for the rest of the year”, he pointed out.
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The composition of the official measure of producer input price inflation has already shifted, and is now being driven by the cost of imported goods.
