Market Drivers for week ending July 22, 2016
UK PMI* hits 41-month lows
Euro Zone PMI mostly in line
Europe and Asia:
EUR EZ Flash PMI 52.9 vs. 52.5
GBP UK PMI Manufacturing 47.4 vs. 48.7
GBP UK PMI Services 49.1 vs. 48.7
CAD CPI 8:30
CAD Retail Sales 8:30
USD PMI Manufacturing 9:45
*Purchasing Managers Index, based on 5 major indicators, new orders, inventory levels, production, supplier deliveries and employment environment
UK PMIs in July cratered falling to 41-month lows in the aftermath of the Brexit vote, sending GBP/USD tumbling more than 100 points lower in morning London trade.
Both UK Manufacturing and UK Services PMIs dropped sharply with Manufacturing printing at 47.4 from 52.1 the month prior while Services came in at 49.1 versus 52.3 in the previous period. In services the new orders component essentially cratered dropping to 45.5 from a prior 52.3 suggesting that business pulled orders in the aftermath of Brexit. This is crucial to the health of the UK economy as services represent the vast bulk of UK economic activity.
With both PMI gauges now firmly below the 50 boom/bust line the prospect of further easing from the Bank of England in August appears assured. The only question is whether UK policy makers will cut rates by 25 basis points or drop them by fully 50 basis points to zero.
The sharp drop in PMIs also suggests that UK Gross Domestic Product in the third Quarter will likely contract for the first time since March of 2013 although it may be too early to tell whether the impact of Brexit will send the Pound into a full-blown recession this year. The action in July was a clear reaction to the shock of the Brexit vote, but with UK policy makers in no rush to invoke Article 50 and begin the process of separation, business confidence may revive next month which could ameliorate some of the impact of the sudden contraction in demand.
Ironically enough, the more the UK economy deteriorates the less likely Brexit will become a reality as public opinion will turn sharply against it and Prime Minister May, who had campaigned on the Remain side will likely try to work out some sort of compromise with EU. For now however, GBP/USD will become ever more sensitive to economic data as markets will want to see whether the impact of the Brexit vote is translating to a sustained contraction in demand. GBP/USD tested the 1.3150 support in the aftermath of the report and drifted towards the 1.3100 level as the day proceeded.
Information by courtesy of Boris Schlossberg, Managing Director of FX Strategy, BK Asset Management.