German Recession Fears Grow Pushing the Euro Lower Against the Pound

The British Pound (GBP) has strengthened against the euro as a string of poor data flows out of the German economy.

Fears for the outlook of the Eurozone grew when powerhouse Germany told markets that industrial orders saw their biggest monthly drop since the height of the global financial crisis in 2009.

Industrial output figures for August plunged by 4.0 pct - the biggest fall in five years. Add to this Thursday's news that exports have fell a whopping 5.8 pct in August and we get the sense that the outlook for the region is in decline.

The British pound to euro exchange rate (GBP/EUR) jumped higher on the industrial output release; the exchange rate was quoted 0.34 pct higher having hit 1.2753.

Our last update (Thursday) sees the pair trading at 1.2719. The EUR/GBP is at 0.7864.

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More Action at ECB Now Likely

The German data will have markets betting that further action at the European Central Bank is in the offing with some analysts predicting full-scale quantitative easing eventually being introduced.

Such moves really hurt the pound and US dollar when they were introduced by the Bank of England and US Fed.

A similar negative impact on the shared currency would be likely if the measure were to be introduced in the Eurozone - something many investment bank researchers are predicting to be the case.

If Germany continues to slump then we would see German resistance to full-blown quantitative easing fade away.

The Pound Sterling is a Passenger

There is still little by way of clear trading pattern in GBP/USD or in EUR/GBP at the present time notes Piet Lammens at KBC Markets.

"Both cross rates were still in the first place driven by the gyrations in the euro and/or the dollar, rather than by sterling specific issues. Cable touched an intraday top in line with a temporary setback of the dollar at the onset of the European trading session," says Lammens at KBC Markets.

At the same time, EUR/GBP dropped to the 0.7840 area.

Later in the session both EUR/USD and cable went up and down, but EUR/GBP remained rather close to the intraday lows.

"Contrary to an empty calendar in the US and Europe, the UK production data had the potential to move sterling trading. However, the report was almost perfectly in line with expectations and was largely ignored by currency traders. For now, there is still no unique and clear driver for sterling trading," says Lammens.

Markets Latest: Japanese, Australian Central Banks in Focus

The following foreign exchange round-up comes courtesy of TD Securities:

The USD has steadied and improved somewhat against most of if G-10 peers today but has only recovered a little of the broad ground lost amid Monday’s sharp tumble.

European equities are in the red following more soft Eurozone activity data while commodities—gold, copper, crude—are lower on the day.   

The BoJ has maintained its target to increase the monetary base at an annual pace of ¥60-70tn, while it reiterated that Japan's economy is expected to continue its moderate recovery and that annual inflation is likely to be around 1¼% for some time.  

In Australia, the RBA reaffirmed that the AUD remains "high by historical standards" (despite the significant AUD fall over the past month), but ignored the topic of elevated house prices, a surprise given how much time attention it paid to it recently.  

In New Zealand, the NZIER Business Opinion survey for Q3 dropped from 32 to 19, a result consistent with growth of 2.8% y/y.  German Aug Ind Prod contracted by 4% m/m (mkt –1.5%), the biggest drop since Jan 2009.  

The statistics agency is attributing part of today’s fall to summer holiday effects, but has given no indication of their magnitude.  In turn, UK Manuf and Ind Prod were in line with consensus, rising 0.1% m/m and unchanged from last month, respectively.  

The BoE Credit Conditions Survey showed that demand for mortgages ‘decreased significantly’ in Q3.  

Norwegian Aug Manuf rose by 1.0% m/m (mkt –0.2%), although the details were mixed.