In July, the contraction in manufacturing activity in Great Britain appeared to be worse that initially expected, achieving its worst value since early 2013, as Monday’s industry data states.
Market research group Markit reported that in June its British manufacturing PMI sagged to a seasonally adjusted 48.2 the previous month from a reading of 52.1.
Since 2013, it was the worst level and it came below the preliminary report issued on July 22, which had shown the PMI tumble to 49.1 in July.
On the index, a reading higher 50 points out to industry expansion, while the reading below is a clear signal of contraction.
In the report, it was indicated that the domestic market was heavily impacted by uncertainty both before and after Britain’s vote to leave the EU.
Apart from that, the market research group stressed that weaker pound exchange rates contributed to fresh export order growth.
The weakening order book trend, as well as upswing in cost inflation indicated further near-term pain for British manufacturers.
China July factory activity suddenly slumps
In July, activity in Chinese manufacturing sector suddenly eased because orders cooled, while flooding disrupted business, an official poll revealed, thus contributing to fears that China’s economy will slow in the nearer months unless the government gets down to a huge spending spree.
While a similar private poll disclosed business picked up for the first time for 17 months, the actual growth was minor and the much larger official poll conducted on Monday suggested that China's overall industrial activity is still sluggish.
Both polls demonstrated persistently poor demand at home and also abroad. As a result, companies were forced to keep shedding jobs, even as Beijing vows to shut more industrial overcapacity, which could potentially lead to huge layoffs.
As for other Monday’s readings, they pointed to signs of apparent cooling in both the construction industry as well as real estate, that were major drivers behind better-than-expected economic growth during the second quarter.
USD rose to the highest level in four months in last trading session of the week as the positive economic data increased expectations that US Federal Reserve (FED) will raise interest rates until the end of the year. In trading sessions of 20th July, the US dollar index measuring the strength of the greenback versus a basket of currencies was closed at 97.50 raising to 0.5%, the highest since March 2016.
According to the Association of American national real estate, home sales in the country last month rose 1.1% in June, the fourth consecutive rising month, the highest level since February 2007. On the job market, Labor Department said the number of applications for unemployment benefits on 16th of July firstly fell 1,000, to 253,000, a 13-week low. Data released earlier also showed that retail sales, consumer prices and industrial production in the US in June rose further. Meanwhile, reports of non-agricultural jobs in June announced earlier this month, also stressed the labor market is recovering strongly and allay concerns about the deceleration of economic growth.
The recently released positive data on US economy increases expectations of investors that Fed will raise interest rates before the end of this year. The percentage predicting the Fed will raise interest rates by 0.25% from the end of the year has risen to 46% from 12% in earlier this month.
Periodic policy meeting of Fed will take place on 26th and 27th of July, and in anticipation of observers, the agency will keep interest rates at this meeting and wait for the evaluation of the impact of the UK leaving the EU for US economic outlook before adjusting interest rate policy. In spite of not giving policy direction for the coming period, any positive assessment of Fed for the US economy bring considerable support for USD.
British Pound fell sharply in the last session of the week because British economy shows worrying signs of the first month since UK chose to leave the EU. Markit survey published on Friday showed that both PMI manufacturing and services in July of UK will fall below 50, this indicates contraction. In July PMI fell to 47.7 from 52.4 in the previous month. Thus the index has fallen to the lowest level since early 2009. July's PMI warns UK economic growth will decline significantly in the third quarter. Most analysts predict that the Bank of England (BoE) will cut interest rates at its meeting next August and the issue is whether the cut will be 0.25% or 0.5%.
Investing - On Friday, the Japanese yen reversed earlier weakness and earned moderately during Asia trade as a manufacturing gauge demonstrated a sort of revival.
Japan posted the provisional manufacturing PMI for July at 49.0, which is better than the expected value of 48.3, and even higher than June’s outcome of 48.1, although still below expansion.
The currency pair USD/JPY was worth 105.83, showing a 0.03% dip, while AUD/USD hit 0.7474, slumping 0.25%. The common currency sagged 0.03%, trading at 1.1023.
The US dollar index, traditionally measuring the greenback’s power against six major currencies, ascended 0.02%, being worth 96.96.
Overnight, the major American currency pared losses against the other key counterparts because a stronger American housing sector data gave support, while upbeat remarks by Mario Draghi, ECB governor failed to ease global growth worries.
Data showed that American existing home sales surged by 1.1% in June to approximately 5.57 million units from May’s outcome of 5.51 million units and it was revised from the initial reading of about 5.53 million.
British Pound rose again in the trading session of the early week after policy maker at Bank of England (BOE) Martin Weale said that they need to wait for the assessment of the economic impact before deciding whether to rate cut or not. After BOE took no action last week, any doubts of the members of BOE on the need to easing monetary policy given push Pound higher.
However, many analysts believe that sterling is in brief recovery period and the clearance-sale of the currency will soon return. A series of important statistics of the British economy published this week include the inflation data, employment, retail sales and PMI index is forecast to show the weakness of the British economy and convince BOE on the necessity of easing interest rate policy. Britain's weak data published this week could be the beginning of a sharp decline of Pound.
Turkey has arrested thousands of soldiers after the coup failed yesterday 15th of July and the government claimed to have control of the whole situation. This move has helped to allay fears of new instability after the economic and political issues in Europe, this prompted investors to return to riskier currencies and escape Japanese yen as safe haven assets, so it pushed USD/JPY back to threshold 106 after falling last week.
Aside from the economic data of UK, the market's attention this week was focused on the PMI of Eurozone and the results of the meeting of European Central Bank (ECB). Analysts predict ECB will not make any policy changes in this session. However, ECB President Mario Draghi might open to a stimulus in the near future if Eurozone economic prospects deteriorate due to the influence of Brexit. Any signals of easing policy given will create downward pressure on Euro.
GBP/USD: SELL: 1.3280; TARGET: 1.3130; STOP-LOSS: 1.3360