Sterling soared above $1.32 against the dollar on Thursday after U.K. manufacturing data for August showed one of the sharpest rebounds ever. The currency jumped 0.9 percent from an earlier $1.3152. But analysts have warned that this correction is likely temporary.
U.K. Manufacturing PMI rose to 53.3 in August, up from 48.3 in July – one of its lowest level since February 2013 as Brexit uncertainty knocked sentiment in the sector. The five point month-on-month jump in the Markit PMI was the joint biggest rise in the index's 25 year history.
The better-than-expected numbers pushed sterling higher with the markets expecting a rebound of sterling. However some analysts believe the bounce could be short-lived.
"In the near-term, while we are seeing sterling gaining we would view the correction as likely temporary, not least as the data will embolden those within government looking for a hard Brexit, ignoring the single market," Jeremy Stretch, Head of G10 FX Strategy, CIBC Capital Markets told CNBC via email.
He further warned that sterling may have a tough ride ahead. "We would expect that the trough in sterling has yet to be seen and may not be occur until Article 50 is triggered."
One analyst told CNBC via email that this movement would be the best from the pound since the Bank of England cut interest rates a month ago.
"We're seeing strong bid for sterling after a stonking manufacturing PMI showed the U.K.'s factories sparked back into life in August following the July post-Brexit slowdown," Neil Wilson, markets analyst at ETX Capital said, adding that the weak pound is a double-edged sword and its effects are starting to look as predicted – "good for exports, but bad for consumers as inflation bites and purchasing power is hit."
The currency has seen a lot of volatility in the last two months since the U.K. voted to leave the European Union. While the initial moves were dramatic, plunging from the highs of $1.50 to a 31-year low of $1.32, the currency continues to remain under pressure at current levels of $1.32. Sterling is down nearly 11 percent since the start of the year.
A number of analysts have warned that with the U.K. heading into so much uncertainty, sterling appreciation may not come until growth outlook improves.
"The referendum result took a real toll on the pound, so the more data we get shrugging off Brexit, the more we can expect sterling to rise," Laith Khalaf, senior analyst at Hargreaves Lansdown told CNBC via email.
He however warned that there will be challenges. "There are still many twists and turns left to be navigated in Britain's exit from the EU, and with parliament re-opening next week, we will start to build a picture of how the government intends to try to steer the process."
A number of currency analysts had earlier predicted sterling to slip towards $1.25 against the dollar. Speaking to CNBC this month, David Stubbs, global market strategist at JPMorgan Asset Management said uncertainty over the policy future could push sterling further down.
"As hard evidence of the economic slowdown continues to build, monetary policy is eased further and investment flows into the U.K. are dampened by uncertainty over the policy future, sterling is expected to slip towards 1.25 against the U.S. dollar."
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