Sterling Vulnerable With Further Easing Looking Imminent After Soft Data
UK industrial production in July showed continued weakness contracting by 0.2% from June widely missing expectations of a 0.2% expansion, the reading marks the 3rd contraction in industrial production on a monthly basis so far this year. The annual figures were equally bad coming in at -0.7% amid expectations of -0.4% the reading marked the 4th consecutive contraction, standing in stark contrast to industrial production figures this time last year which were hitting record highs. On the manufacturing front things were a tad brighter as monthly figures modestly beat expectations of a flat reading (0.0%) coming in at 0.1% while annualized numbers met expectations of 1.9%, despite the as expected annual showing it still marked the slowest expansion in 3 months and the 2nd worst showing in 17 months.
The slowdown is to be somewhat expected as elevated inflation continues to erode incomes and purchasing power, as domestic demand slumps companies are unwilling to invest in new technologies or building inventories. This drop in consumer demand comes amid ongoing uncertainty about the outlook for the UK economy as it struggles with the sharpest government spending cuts in decades resulting in the loss of hundreds of thousands of public sector jobs. And, in the bigger picture, the deterioration in the EMU, the UK’s largest trade partner, which is failing to deal with the spreading debt crisis and concerns about bank and sovereign solvency. The Chancellor of the Exchequer Osborne said yesterday that the UK economy is not immune from the debt crisis in the EMU. The Bank of England will certainly be considering all this as their policy meeting gets underway today and are set to announce rates and asset purchases tomorrow at 11:00GMT. (Join Technical Currency Strategist Joel Kruger to cover this event LIVE tomorrow)
The reaction to the soft looking production data was quite choppy as markets were still digesting the recent developments further afield in the form of the German court ruling that German participation in the EFSF does not violate constitutional rules of how the government can use taxpayer money. The pound did take an initial dive but this move was quickly pared with players eager to buy into risk this morning.
Taking a step back to look at a daily chart we can see Gbp/Usd is rebounding intraday after several days of having been beaten down. Despite this intraday bounce we continue to favour moves to the downside in lieu of further monetary easing expected from the Bank of England in coming months as they try to help stabilize the economy going into Q3. With the greenback well positioned to make hefty gains – with the yen and franc effectively neutered as safe haven plays – and with the imminent prospect of further quantitative easing in the UK the downside in Gbp/Usd looks vulnerable with the favoured strategy of selling into rallies. For a full technical outlook.
Written by Jonathan Granby, DailyFX Research Team
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.