Trading Post

January 2, 2013 4:44 pm

UK bullishness pervades FX

Whether 2013 will finally be the year that the UK loses its triple-A credit rating will depend on how the rating agencies view fiscal progress and growth prospects. PMI data showing manufacturing activity hitting a 15-month high is a promising start to the year, at least for Chancellor George Osborne.

Construction and services PMI data set for release on Thursday and Friday, respectively, now provides more guidance to the health of UK plc. But what will it tell us about the fate of sterling?

The pound hitting a 16-month high against the dollar on Wednesday appeared to indicate that early new year UK bullishness was spilling over to the FX markets. But a note of caution is required over any expectations that upbeat PMIs will push the pound even higher.

Sterling’s high was almost enirely due to post-fiscal cliff euphoria – it meandered slightly lower in the wake of the manufacturing PMI. FxPro argues this is confirmation of a theme already in evidence at the end of 2012 – that sterling has a reduced sensitivity to data releases.

A level just above $1.63 proved a tough nut for the pound to crack in 2012 and this is likely to hold true for the early months of this year with the Bank of England not yet convinced of the need for more QE but still a long way from implementing rate rises.

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