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- Sterling trades softer following disappointing data release

- UK manufacturing enters contractionary territory

- Manufacturing pick-up unlikely anytime soon

The British Pound had started the new week on the front-foot against its major competitors, however a disappointing data release out mid-morning has seen the gains reversed.

The Manufacturing PMI for June read at 48, well below the 49.2 that foreign exchange markets were expecting: currencies tend to react to sizeable surprises in economic data and it is therefore little surprise that the Pound has fallen:

The Pound-to-Euro exchange rate is now trading at 1.1160, having been as high as 1.12 earlier in the day. The Pound-to-Dollar exchange rate is trading at 1.2645, having been as high as 1.2705.

The Manufacturing PMI reading now suggests this sector of the UK economy is deep in contractionary territory.

According to IHS Markit, who compile the report, the UK manufacturing sector continued to feel the reverberations of the unwinding of earlier pre-Brexit stockpiling activity during June.

The United Kingdom is thus unambiguously following the global trend of depressed industrial sectors. Additionally, domestic economic growth might remain subdued in the foreseeable future due to global risks and political imponderables. #GBPUSD #FX #Brexit (Chart - BBG) pic.twitter.com/y6Sbw4ECQg

— Marc-André Fongern (@Fongern_FX) July 1, 2019The already high stock levels at both manufacturers and their clients led to a scaling back of output and new order intakes, with demand from both domestic and export markets weakening.

Business optimism dipped to its third-lowest level in the series history during June.

Furthermore, employment fell for the third straight month in June, with job losses seen in the intermediate and investment goods sectors.

There is evidence that the global slowdown in manufacturing is also playing a sizeable role in the UK slowdown.

"Demand from the domestic market weakened, while the additional constraint of slower global economic growth meant new export business fell at one of the fastest rates since late-2014," says Rob Dobson, Director at IHS Markit.

The new export orders balance remained around 46, indicating that export orders are falling.

"Another dreadful UK data release. Manufacturing purchasing managers' index weakest since 2013 -production &new orders at 7 year low. It's largely an unwind of the Brexit related stock piling earlier this year, but with global growth softening don't expect a rebound anytime soon," says James Knightley, Chief International Economist at ING Bank.

"Looking ahead, the fall in the new orders balance from 48.6 in May to 46.3, the lowest level since May 2012, indicates that output is likely to remain weak for the next few months. What’s more, the global manufacturing sector has continued to deteriorate which will weigh on export orders," says Thomas Pugh, UK Economist with Capital Economics.

The soft UK data follows hot on the heels of equally disappointing data out of Germany where the Manufacturing PMI read at 45, ensuring a multi-month downturn in the Eurozone's powerhouse continues.

However, the disappointing German data was well expected, whereas the UK data is more of a surprise, and this will explain why the GBP/EUR exchange rate dipped lower.

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