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04 September 2016

Sterling continues to strengthen

Since June, the pound has felt like a city under siege, unable to hold off marauding 'Brexiteers' as fear and uncertainty dominated the headlines.

Signs the siege could be lifting have started to appear since mid-August. A couple of weeks ago, investors had more short positions against GBP (bets that GBP would fall) than ever before.

However, an unwinding of these positions and a run of tepid data provided relief and support for the battered currency as the pound managed to consolidate its position.

Last week, the siege appeared to be well and truly broken as the UK currency started a march upwards against its peers. A run of positive economic data gave sterling a reprieve from the lows of €1.1695 and $1.3067 at the start of the week. Improved consumer confidence figures and better than expected house price data from Nationwide early in the week helped to get things moving. While astonishing UK Manufacturing PMI numbers put the pound in full stride as the August number rose to 53.3 from 48.3 in July (above 50 shows expansion) giving it the biggest rise in the data's 25-year history.

"The August PMI data indicate a solid rebound in the performance of the UK manufacturing sector from the steep downturn that followed the EU referendum," said Rob Dobson, senior economist at IHS Markit.

"The domestic market showed a marked recovery, especially for consumer products, while the recent depreciation of sterling drove higher inflows of new business from the US, Europe, Scandinavia, Middle East and Asia," he added.

It is important to remember that manufacturing is a small part of the UK economy these days. All eyes will be on Monday's Services PMI figure. As services account for 75% of the UK's GDP, a better than expected number could send sterling towards €1.20 and $1.35 respectively. A much worse figure could see the pound hit new multi-year lows.

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