Currency Watch: Manufacturing the recovery

UK manufacturing boosted the pound as the Purchasing Managers’ Index bounced back into positive territory this week with the strongest number announced since May 2011.

Orders also rose at the fastest pace since March, but before we all break open the bubbly, it’s important to note that, like the wider economy, the manufacturing sector is by no means secure at the moment.

The release did drive the pound forward, however, with gains against both the dollar and the euro immediately after the announcement.

The one thing I don’t think this newly-found manufacturing strength has done is change the market’s (or the Monetary Policy Committee’s) views on the need for further quantitative easing, to help boost the UK economy further.

When the Bank of England last decided to pump in some cash in October, the committee emphasised that this was more as a result of difficulties in the Eurozone, than because of on-going problems in the UK.

Now, while a Lehman Brothers-style meltdown has been averted courtesy of the European Central Bank’s new lending operation, the threat of recession and diminished confidence cannot be spirited away. This is the problem.

Any potential European recession would have a less deep but more protracted impact on our economy, and that’s why I expect that the Bank will serve up another round of quantitative easing.

Given the fall-off in money supply numbers seen last week, it could quite possibly be more than the £75 billion the markets expect. A great deal will depend on the data we get from services and retail. Watch this space.

In the Eurozone we saw inflation remain low this week, with CPI coming in at 2.7% on the year. I reckon it’s 50/50 whether we see an interest rate cut from the ECB this month.

I would expect that they will wait until March and use the combination of a rate cut and a new injection of bank funding to obtain the most “bang for their buck”.

In an update to the story that never dies, we have heard nothing new as to whether the parties involved are any closer to striking a deal on Greek PSI.

The market has given up caring to be honest and even negative comments from ratings agency Fitch, which three months ago would have caused mass hysteria in bond markets, are now greeted with a cursory glance and a sigh.

Jeremy Cook is chief economist at World First foreign exchange