01/10/10

By Claire West

Data this morning has put another thorn in sterling’s side after data revealed a further slowdown in UK manufacturing activity. The purchasing managers’ index slipped back to 53.4 in September from a downwardly revised 53.7 in August.

Although still holding above the important 50.0 level, which marks industry expansion, the index is at its lowest since November as export orders disappoint. The data is likely to lend further support to the dovish members of the BoE who believe current conditions warrant a further round of quantitative easing in order to safeguard the recovery.

Duncan Higgins, senior analyst at Caxton FX says, “the data simply fuels the argument that additional monetary easing is necessary. Activity in the manufacturing sector has been on the decline for four straight months, which does not bode too well for third quarter growth.”

Higgins continues, “Quantitative easing is likely to be the hot topic at the next MPC meeting on Oct 7th and a decision in favour would send sterling through the floor. It is far from a foregone conclusion, but should the figures continue to paint this picture of a recovery losing steam, the argument against QE will become ever harder to defend.”
The initial reaction in the market was to sell sterling but it has managed to recover most if its losses as the market turns its attention to a barrage of data from the US this afternoon.

Higgins adds, “although sterling can lean on a weaker US dollar, against the increasingly resilient euro it is facing further losses.”

Dollar weakness is again the predominant theme this morning, offsetting the disappointing UK figures and enabling sterling to climb back to $1.5850. Against the euro, sterling is holding relatively steady after data revealed a rise in overall employment in the eurozone, which undermined the single currency’s earlier gains.