Despite Brexit, the Pound is performing near its 10 year average against the Euro. With concerns now for economic contraction, it's likely that Sterling will come under further pressure in the weeks and months ahead.

The UK’s Service and Manufacturing Sectors are now contracting

After a quiet day for both UK and global economic news releases yesterday, much of the talk regarding the UK centers on last Friday’s disappointing updates on the UK’s economy.

Friday’s news releases came in the form of PMI Manufacturing and PMI Services data. PMI stands for Purchasing Managers Index and it provides us with an idea of business conditions in the UK in terms of output, new orders, employment levels, sales and forecasts.

Figures below 50 indicate a contraction whereas above 50 indicate growth. Both figures came out below 50 with manufacturing in the UK declining by more than analysts had expected. These releases suggest the UK economy is shrinking at a quarterly rate of 0.4% and that both sectors are contracting at the fastest pace since 2009.

There have been calls from prominent figures such as Shadow Chancellor John McDonnell for the government to intervene, and personally I think should we receive further indications of a slowing economy in the UK, we can expect another recession and a further drop in Sterling exchange rates through 2016 and perhaps into 2017.

Sterling exchange rates begins the week well despite signs of a contracting economy

Sterling exchange rates begun the week in positive fashion yesterday with the Pound trading up against most major currencies even if not by a substantial amount.

This may well be attributed to improved sentiment towards the UK economy moving forward, as over the weekend it emerged that Chancellor Philip Hammond begun discussions with China on what’s being considered an ‘ambitious’ free trade deal between the UK and world’s second largest economy. He told the BBC it’s time to explore ‘new opportunities’ and that this deal would allow greater access for major Chinese banks and businesses to the UK economy.

Moving forward I expect to see further developments which could bode well for the UK outside of the EU, but in the short term I think the knock-on effects of the ‘Brexit’ will continue to weigh on the Pounds value.

Potential market movers for Sterling this week

This week’s Q2 UK GDP report at 9.30am on Wednesday is expected to show that the economy was performing better than expected heading into the referendum. 0.5% is expected which would show an improvement from the previous quarters figure of 0.4%, but expect movement within exchange rates should that figure come out some distance from the expectation, especially at the moment. Feel free to get in touch with your assigned currency broker if you wish to discuss this news release, and its potential effect on Sterling exchanges rates on Wednesday morning.

Overnight it emerged that Natwest and RBS have become the first UK banks to warn that they may have to charge to accept deposits due to low interest rates. There is also talk of reconstructing the FCA after the House of Commons Treasury Committee has labelled it outdated and unfair.

Thank you for reading today’s Sterling report, I would appreciate any feedback you have and would be happy to assist you with any currency requirements. Feel free to e-mail me at jxw@currencies.co.uk.

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