Sterling Tumbles on Weak PMI Data

Posted On 06 Jan 2015
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Sterling moved back below 1.5200 in the wake of the big services PMI miss and the decline in mortgage lending. The August 2013 low at 1.5102, is now in the crosshairs. Much of the downward pressure reflects general dollar strength. Cable remains in a bigger picture bear trend, which has been persisting since the July cycle high at 1.7192 and which has accelerated in early New Year trade. The sharp drop in the UK composite PMI, along with a CPI rate of 1.0%, will strengthen the dovish voices at the BoE’s Monetary Policy Committee.

UK Markit services PMI much weaker than expected, dropping to 55.8 in the headline reading in the December survey, a 19-month low and down from 58.6, and well off the median forecast for 58.5. This follows similar sub-forecast declines in the manufacturing and construction PMIs, driving the composite PMI to 55.4, the lowest since May 2013, from 57.8. This still indicates decent expansion, but a marked deceleration nonetheless. Stagnation in the Eurozone economy has been affecting the UK. Sterling and UK yields dipped on the data as the data, along with a CPI rate of 1.0%, implies that the BoE will not be in any hurry to tighten policy.

UK saw the biggest drop in mortgage lending since Q3 2008, according to the BoE’s Q4 Credit Conditions report. The BoE’s survey found that UK banks are expecting a slowdown in both mortgage and consumer credit lending over this quarter, and lending to corporations to be stable. Policymakers have been orchestrating a cooling in the property market, and last year implemented stricter lending criteria, which partly lies behind the drop in mortgage lending.

Negative momentum continues to accelerate as the MACD (moving average convergence divergence) index generated a sell signal. This occurs as the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread. The only caveat is that the GBP/USD is oversold. The RSI is printing a reading of 27, which is below the oversold trigger level of 30 and could foreshadow a correction.

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