EUR/GBP: Pound Strengthens as Manufacturing Unexpectedly Expands

The British pound is deemed to strengthen alongside the Euro today as a gauge of UK manufacturing unexpectedly expanded in December, suggesting renewed strength in the economy at the end of 2012. In contrast, the Euro is apt to dip as a similar factory report for the Euro Zone contracted more than expected and as labor reports due today are estimated to come in weak.

In a report that largely boosted the outlook for the UK economy, British manufacturing expanded at its fastest pace in 15 months in December as domestic demand improved. The Manufacturing PMI rose from a revised 49.2 to 51.4 points last month, effectively registering its first expansion since March 2012. The report also revealed that manufacturing output, which accounts for about 10 percent of the British economy, increased for a second month in December to the highest level in 20 months, boosted by domestic demand translating into higher production of consumer goods. Economists see the data as a welcome surprise, which raised hopes of a manufacturing recovery in 2013.

Such positive sentiment was reflected by a survey which showed increased optimism among business leaders about the economic outlook for the year ahead. Today, positivity is set to continue as the Construction PMI is believed to have improved slightly in December. The gauge of construction activity is projected to increase from 49.3 points to 49.6 points, indicating a slower contraction during the month. Taken together, economists say that the chances the UK will succumb to a triple-dip recession are reduced, thereby buoying the Sterling in turn.

On the contrary, factory conditions in the Euro Zone shrank further in December as factories across the region slashed output levels. Markit reported that the Manufacturing PMI edged down to 46.1 points in December from 46.2 in the previous month, suggesting another sharp contraction in activity. In a statement accompanying the release, Markit said that manufacturing remained entrenched in a steep downturn, indicating that the recession likely deepened in the final quarter of 2012. Today, reports are seen to show that labor market conditions in Spain and Germany remain bleak. The Spanish Employment Ministry is projected to report that an additional 50,300 individuals joined the ranks of unemployed in December to follow the 74,300 increase in November. In Germany, 11,000 individuals were estimated to have been unemployed in November, higher than the 5,000 count in October. On signs of a deepening recession, the single currency is seen to weaken, warranting a short position for the EUR/GBP.

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