British Pound Slips Against Euro, Dollar on Soft UK Manufacturing Stats

Sterling was seen falling on Friday, April 7 in the wake of the latest set of UK economic data.

UK manufacturing production figures from the ONS showed another contraction at a time markets were expecting an increase in activity.

This is the second consecutive decline in the data with the previous release covering data for January showing a decline of 0.9%.

Markets were forecasting a reading of +0.3% but -0.1% was delivered and the British Pound fell on the disappointment:

The Pound to Dollar exchange rate is lower at 1.2419 having been seen as high as 1.2479 earlier in the session.

The Pound to Euro exchange rate is lower at 1.1678 having been seen as high as 1.1725 earlier in the session.

The data caps off a sluggish first quarter for UK data and lends itself to the theory that economic activity in the UK is likely to edge lower from here and weigh on the Pound in the process.

"Today’s deluge of UK economic data was fairly disappointing and adds to the evidence that the economy has lost some momentum during Q1," says Ruth Gregory at Capital Economics in a note following the release.

Output fell in both the manufacturing and construction sectors for the second month in a row, by a monthly 0.1% and 1.7% respectively.

Meanwhile, industrial production dropped by an even larger 0.7% on the month, dampened by the impact of the unusually warm weather on the energy supply sector.

The soft data revives the idea amongst investors that the Bank of England will not be looking to raise interest rates in the near future despite some suggestions that the Bank might raise rates as early as the second quarter of 2018.

Should expectations for such a move at the Bank be pushed back we would expect Sterling to head lower over the near-term.

Analyst David Boom at HSBC says he expects UK data to turn softer over the near-term horizon and this should keep the Pound’s strength limited.

HSBC have made a tactical recommendation to clients that they consider selling the British Pound on any rallies in anticipation of an intensification of political risk, the structural headwind of the current account deficit and possible signs of softness in the economic cycle.

HSBC have previously recommended that GBP/USD is to be sold at 1.2540 - we are obviously below this level now and speculators would probably be best served by sitting this one out.

“Those not already engaged in GBP may be tempted to wait for better levels to sell, somewhere in the 1.2700-1.2850 region where it last topped out,” says Bloom.

But it might be too soon to turn all-out negative on the Pound.

Analysis of the manufacturing and industrial production data by Lloyds Bank suggests that there could be a pick up in activity over coming months.

"While manufacturing survey readings have softened somewhat in recent months, momentum in official ‘hard’ data had been improving sharply in advance of today’s release," says a note released by Lloyds to commercial banking clients in the wake of the release.

Lloyds argue the weak outturn for February closes the gap a little, with rolling quarterly momentum decelerating from 1.9% in January to 1.6% February.

"Nevertheless, industrial output still seems likely to make a positive contribution to GDP growth in the quarter," say Lloyds.

Taken together, the outlook for the economy and the Pound looks evenly balanced at this juncture.

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