Should you buy or sell the British pound amid weak manufacturing data?

The new year has started, and liquidity is back in financial markets. The UK Manufacturing PMI data was released today, creating bigger than normal volatility in the GBP currency pairs.

It showed that the sector continues to shrink. Production and new orders are in free fall, and job losses accelerate.

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If a picture is worth a thousand words, then the chart below should speak for itself. It shows the manufacturing sector quickly contracting, unable to bounce back above 50.

When interpreting the PMI data, 50 is the line in the sand. Any print above 50 shows the economic activity in the sector is expanding. Conversely, any print below 50 shows the economic activity is contracting.

Moreover, the further the PMI moves away from 50, the more severe the contraction or the most powerful the expansion.

Details of today’s UK manufacturing data

The Final Manufacturing PMI exceeded the market expectations, meaning the actual 45.3 was higher than the expected 44.7. However, the details of the report are a concern to anyone interested in investing in the United Kingdom or in the British pound.

More precisely, the downturn in manufacturing was increasingly reflected in the labor market. Take job cuts, for example – this was the third consecutive month with job cuts. Moreover, the rate of job losses has been the steepest since October 2020.

Also, average purchase prices rose for the 37^th consecutive month. In other words, inflation keeps rising in the United Kingdom.

How did the British pound react to the news?

The British pound reacted with a mixed tone to the news. For example, the GBP/USD currency pair dropped by about 0.5%, but the decline might easily be attributed to a strong US dollar, as the greenback opened the year on a strong note.

On the other hand, the pound strengthened against the euro, as shown by the EUR/GBP exchange rate, down by about 0.5% today.

All in all, with many investors and traders still on holiday, today’s GBP moves may not be relevant. However, the weakness in the UK manufacturing sector remains, and details in the report should not support the currency in the medium term.