The UK manufacturing PMI posted a reading of 52.1 in January, much better than the forecast of an increase to 50.2 from 49.6 in December.

From Markit: Manufacturing production expanded for the second successive month in January, supported by growth of new orders and the clearance of backlogs of work. Companies reported an increased willingness to spend among some UK clients and a further increase in new export orders. Higher output also led to a slight rise in stocks of finished goods, the first increase since April 2008.

Foreign demand rose for the second month running in January, amid reports of improved order inflows from clients in Brazil, China, the Middle East and the US. However, the rate of increase was only moderate and less marked than one month earlier.


That brings the sector back into expansionary territory which may be a sign that the UK economy may avoid a technical recession if it can eke out some small GDP growth in the 1st quarter.


Manufacturing makes up about 10% of GDP, and in the 4th quarter, manufacturing contracted by 0.9% - a key reason GDP fell 0.2% q/q during the quarter.

This strong start for manufacturing in the 1st quarter bodes well for the prospects of skirting a technical recession, though whether the January data is the start of a trend or a one-off outlier will be determined by incoming manufacturing orders data and our February manufacturing reading next month.

Reaction and Implication for GBP/USD

The GBP/USD responded to the news (and generally better risk sentiment) by moving above its highs from Tuesday's session at 1.5795, finding initial resistance near 1.5865.


Whether these data changes the mindstate of the Bank of England when it comes to more quantitatve easing is debatable. The current bond purchase program is set to run out this month, presenting the BOE with a key choice in the February interest rate meeting.

Still, the GBP/USD, if we zoom out to the daily timeframe has managed to stage an almost uninterrupted rally over the last 3 weeks, and today's action pushed the pair above a key resistance level (1.5770) which had acted to cap GBP/USD strength in December.


This suggests that the Pound may be able to extend its moves even further, especially if the upcoming UK services PMI shows that sector expanding as well. The market would need to have some general positive risk sentiment as well. We do have one factor that could imply that the rally may need to retrace, and that is the move of the daily RSI to near 70.

If we see the GBP/USD retrace, the old levels of resistance at Tuesday's low (1.5795) and the horizontal trendline (1.5770) will turn to support levels. If they break we may see either a pullback or the start of a sideways correction as the pair resolves its overbought' condition.

Today's data makes it more likely that the BOE will not take the most aggressive approach, and while we anticipate more QE, the amount announced may be smaller than what we saw back in October, which should be supportive of the GBP.

Nick Nasad is the Chief Market Analyst at IBTrade and FXTimes - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.

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