daily brief

Pound Under Pressure as Drop In Industrial Production Makes Case For Additional BoE Measures

Tuesday, 07 July 2009 10:09:09 GMT  |  John Rivera, Currency Analyst

The Pound surprisingly found brief support following a disappointing industrial production release helping reverse earlier losses which saw the GBP/USD fall to test 1.6150 but downside risks remain.

Talking Points
•    Japanese Yen: Found Support at 95.00
•    Pound: Industrial Production Unexpectedly Falls
•    Euro: German Factory Orders Rise Most In Almost Two Years
•    US Dollar: Risk Appetite Continues To Dictate Sentiment.

Pound Under Pressure as Drop In Industrial Production Makes Case For Additional BoE Measures

The Pound surprisingly found brief support following a disappointing industrial production release helping reverse earlier losses which saw the GBP/USD fall to test 1.6150. Sterling had been under pressure as speculation that the BoE would increase their quantitative easing measures was reinforced by the British Chambers of Commerce says recovery 'is not guaranteed,'  and urging the central bank to expand its asset purchase program by £25B. Industrial activity in the country unexpectedly fell by 0.6% versus forecasts of a 0.2% gain led by a 2.1% drop in mining. Manufacturing production also missed expectations of 0.2% improvement with a 0.5% decline.

The first drop in activity in the last three months will raise concerns over the viability of a recovery for the U.K. and may be enough to inspire the BoE to add to their assets purchase program. The central bank was widely expected to stand pat until they assessed the impact of the initial £125 which they are scheduled to complete at the end of the month. However, as we head into earning season there is a concern that corporate profits will be subdued which could weigh on optimism and threaten to stall current momentum. Downside risks remain for the Pound as we get closer to Thursday policy decision with a test of support at 1.600 likely. We could see a test of the 6/8 low of 1.5801 if bearish sentiment continues. 

The Euro reversed earlier losses as positive equity markets have helped spur demand for the single currency. The biggest gain in German factory orders helped fuel further Euro demand as activity rose by 4.4% versus expectations of 0.5%. The data supported earlier comments from ECB member Miguel Fernandez Ordonez who was touting a global recovery by 2010. The Bank of Spain governor also said that deflation risks didn’t exist for the region and that in Spain that it would actually be a positive for the competitiveness of their industries. Concerns over Spain has been a weighing factor for the Euro as there are concerns that outside of the major economies on the region the rest will struggle to find growth over the near-term. The upcoming G-8 meeting will provide some event risk for the Euro as we have started to see ECB President Trichet call for the U.S. to defend the dollar which could be a veiled attempt to try and spur Euro weakness. Additionally, if we see more talk of replacing the dollar as the world reserve currency then the Euro could find support as a possible substitute. 

The dollar started to regain its footing overnight after a reversal in risk appetite yesterday had the greenback under pressure. An improvement in ISM Non-manufacturing to 47.0 from 44.0 helped spur optimism, as the indicator also showed a significant pick up in the employment component which helped eased concerns over the disappointing NFP report. We may see price action continue to oscillate as traders weigh the significance of each piece of fundamental data. ABC consumer confidence is the only release due today and the second tier indicator shouldn’t have an impact on price action as the expected improvement to -50 from -51 is relatively unchanged. U.S. futures are pointing toward a lower open which could lead to dollar strength if risk aversion prevails on the day. However, we are seeing bullish sentiment in Europe which is starting to lead to dollar weakness.

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Forex Technical and Fundamental Forecasts for July

To discuss this report contact John Rivera Currency Analyst: jrivera@fxcm.com

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