LONDON (Reuters) - The pound strengthened against both the euro and the dollar on Thursday, even after dire British preliminary PMI readings for April, as market activity appears immune to new data about the disastrous economic fallout from the coronavirus.
The IHS Markit/CIPS Flash UK Composite Purchasing Managers’ Index (PMI) fell to a record low of 12.9 from 36.0 in March - not even close to the weakest forecast in a Reuters poll of economists that had pointed to a reading of 31.4.
The scale of the collapse all but guarantees a huge contraction in the world’s fifth-largest economy and will add to doubts about whether financial help from the government has reached businesses quickly enough.
“This is indeed a very steep and deep contraction that we’re in at the moment, but that’s something that we already knew because of the fact that it is government mandated that businesses are closed,” said Bert Colijn, a senior economist at ING.
“There’s zero output for a lot of companies, so it shouldn’t really be a surprise that that’s happening.”
Colijn added that, because PMI is a diffusion index, negative answers simply indicate that things are worse than the previous month, rather than showing how much worse, meaning it does not show the full depth of the crisis.
Versus a broadly weaker dollar, the pound was up 0.4% at $1.2385. Against the slightly firmer euro, which also saw worse-than-expected PMI data on Thursday, the pound was up around 0.4% at 87.43 pence.
As Britain’s lockdown measures limit people’s ability to live, work and spend money as normal, economists expect the country to see its worst economic contraction in more than 300 years.
Bank of England official Jan Vlighe said that Britain’s economy was experiencing possibly its deepest economic shock in several centuries and a quick bounce-back once the lockdown eases was unlikely.
A Reuters poll of nearly 80 economist published on Thursday estimated that Britain’s gross domestic product would see its biggest quarterly drop since World War Two this quarter.
The Confederation of British Industry, which represents manufacturers, said that its quarterly gauge of business optimism had fallen to its lowest since records began in the 1950s.
Also on Thursday, European leaders met via video conference to discuss their response to the crisis, negotiations which have so far been hampered by disagreements on how to finance aid to help the worst-hit economies, such as Italy.
German Chancellor Angela Merkel, speaking before the summit, said she backed using the EU’s multi-year budget for re-launching growth in the world’s biggest trading bloc, which is the UK’s closest trading partner.
Pound-traders are looking for signs of when and how the British lockdown might end.
Restrictions on everyday life are likely to be needed for the “next calendar year” due to the time needed to develop and roll out vaccines or find a cure, the government’s chief medical adviser, Chris Whitty, said on Wednesday.
“(The) UK is definitely not among the frontrunners in terms of moving out of this lockdown,” ING’s Colijn said.
(Graphic: sterling ignores record-low PMI data IMAGE link: here)
Reporting by Elizabeth Howcroft; Editing by Giles Elgood and Alex Richardson