Outlook for Pound Improves as Industrial Production Data Beats Expectations

The pound sterling has shot higher against the US dollar, euro and other majors as we close out the full trading week of 2015.

The outlook for GBP took a negative turn at the start of the year with the first set of economic data releases coming in below expectation, but as we warned, the potential for a relief rally was growing.

The relief has been delivered on Friday the 9th with the release of some better-than-expected figures from the UK manufacturing sector.

Data from the ONS shows Manufacturing Production (YoY) (Nov) grew at 2.7%, well ahead of currency market predictions for growth of 2.3%.

This contrasts to the Manufacturing PMI data released a week ago; the PMI read below expectations and prompted a sharp sell-off in GBP exchange rates.

The pound to dollar broke significantly lower over the course of the past 7 days but the latest positive data release will afford the GBP/USD a chance to establish a temporary base. The pound euro rate (GBP/EUR) has meanwhile powered back to long-term resistance at 1.28 on the news.

Helping sterling / euro higher were industrial production levels from both Germany and France which have come in slightly weaker than expected which keeps the EUR pressured.

Also driving positive sentiment on the UK currency is news that the trade deficit with the rest of the world is smaller than expected.

The Goods Trade Balance (Nov) read at £-8.848B, markets had been expecting a worse reading of £-9.400B which suggests that exporters are seeing improved activity. The lower cost of oil and gas imports will also have played a role in the reading.

David Johnson, Director at currency brokerage Halo Financial responds to the data:

"This morning’s industrial and manufacturing production data for the UK was positive news for the Pound. Industrial production for November matched the 1.1% growth we saw in October and manufacturing production was a marked improvement at 0.7% over last month’s decline of the same amount.

"Economists will take some comfort from the UK’s ability to post improving figures in spite of the drama playing out in Britain’s largest export market; Europe and in spite of the strengthening pound.

"There is no surprise the trade deficit shrank to a degree. However, further Sterling strength, especially against the beleaguered Euro, is not only highly likely but also highly likely to cause problems for UK exporters and that is a concern for the pace of Britain’s economic recovery. Sterling’s current  strength is also in question as the election campaigns gather pace. The growing unease over the impact of another coalition government will weigh on the Pound as we approach May’s election."

But, the Technical Outlook Ultimately Remains Bearish

Despite the buying interest being witnessed in sterling at the current time, technical forecasts confirm more losses are likely.

Analyst Sheena Shah at Morgan Stanley tells us:

"GBPUSD entered the 5th downward trend from the peak of 1.7192 in July 2014, suggesting completion below the 3rd wave low at 1.35.

"Having broken through the bottom end of the trend channel at 1.5330, the next key level is the 2013 low of 1.4858. Breaking this would keep the downward momentum towards the 2010 low of 1.4252. Our outlook remains bearish."

Above sourced from Bloomberg, Morgan Stanley Research.

US Dollar Strength Prevails

Despite a good dose of strong data from the UK it is ultimately the USD that is calling the shots.

"The British pound made another run for the 1.50 level setting a new 1-year low in the process. The decline was driven entirely by US dollar strength and the market's distaste for European assets," says Kathy Lien at BK Asset Management.

The key event of the day is the US jobs data. Nonfarm payrolls are expected to have increased 240K in December (vs last month’s 321K surprise hike), the unemployment may have eased from 5.8% to 5.7%. Slight improvement is also expected on wages.

"Given the FOMC policy stance, the economic data – especially the core inflation and labor market – has gained significant importance in predicting the timing of the first Fed fund rate hike. The markets continue pricing in the first FF rate hike by June 2015, yet persisting uncertainties keep the US yields subdued. The sovereign curve has flattened over the week despite USD gaining broadly," says Ipek Ozkardeskaya at Swissquote Research.

The Fed’s Kocherlakota said the Fed should maintain its zero rate policy in order to avoid an EZ-like deflation and to make sure to boost employment.

Elsewhere, the last few trading days have seen a respite in discussions over Greece and as the gloomy debate has lifted, so to have equity indices levels.