Sterling Rebound

Pound reverses gains after strong PMI; Focus on waning risk appetite

LONDON (Thomson Financial) - The pound quickly reversed short-lived gains after an unexpectedly strong UK manufacturing PMI report this morning as the market turned its attention back to credit concerns and the recent sudden drop in risk appetite.

The purchasing managers' index on UK manufacturing activity from the Chartered Institute of Purchasing and Supply jumped to a three-year high of 55.7 in July from 54.7 in June, revised up from the previous estimate of 54.3.

The reading was way above the consensus forecast of analysts polled by Thomson Financial News, who had predicted a fall to 53.8.

The pound initially rose to a high of 2.0238 against the dollar just after the data from 2.0221 but soon fell back, and at 10.10 am was trading at 2.0218 usd. The euro meanwhile was trading at 0.6749 stg, still down from 0.6751 just before the PMI data were released but off an earlier low of 0.6743.

'Cable (sterling/dollar) has failed to elicited any benefit from July's much better-than-expected UK manufacturing sector PMI, due to the fall in risk appetite' shown by the fall in equity markets, said Robert Howard at Thomson IFR Markets.

Nevertheless, the strong survey will put a rise in Bank of England interest rates to 6.00 pct in the autumn firmly back on the cards.

'Not that the bond or the forex markets are used to paying much attention to the data in the current environment, but if anything, today's report could rekindle rate hike speculation,' said Jodie Tiller at CIBC Markets.