Pound Boosted by Manufacturing Production Figures, Euro Stronger on Bond Sell-Off

The pound sterling has staged as solid recovery against a number of currencies, US dollar included, on Tuesday.

The move higher comes after the UK unit was seen deep in the red as London traders took over from Asia.

The catalyst for the recovery was the release of some better-than-expected manufacturing and industrial production figures. The relief at the good outcome was notable simply because many in the currency markets remain concerned the rate of growth in the UK’s economy is slowing.

The pound v euro rate has however failed to stage a recovery thanks to an overwhelmingly stronger euro exchange rate family owing to the continued sell-off in global bonds.

UK Data Ahead of Expectations

Industrial Production (MoM) (Mar) grew by 0.5%, markets had priced the pound lower for a reading at 0.1%.

Manufacturing Production (MoM) (Mar) read at 0.4%, better than the 0.3% forecast.

With the manufacturing element of the economy growing we see no real argument for the Bank of England to delay an interest rate cut to 2016 as there is yet to be any real evidence of a slowdown in economic growth.

All eyes will now turn to Wednesday’s Inflation Report and employment data for confirmation as to whether this pro-GBP thesis remains alive.

The Euro Powers as Bonds Slump

Interesting goings-on in the Eurozone today. The Greeks have done something interesting – they have borrowed money from the IMF to pay back another outstanding loan to the IMF.

Meanwhile, the global bond sell-off has gathered pace - when bonds fall the euro rises.

"European bonds came under quite some pressure. Long term interest rate differentials between the US and Europe narrowed again. It is still a bit remarkable, but this long term spread move supported the single currency even as the news flow on Greece didn’t improve and as European equities underperformed," says Piet Lammens at KBC Markets.

According to Reuters the Greek government tapped its funds at the IMF to make today’s €750m payment to the IMF. Based on the limited information it would seem that Greek government has possibly tapped its Reserve Tranche Position (RTP) at the IMF in order to meet today’s obligation.

The RTP basically allows IMF members to draw funds at short term notice to meet its needs and must be repaid within ‘several weeks’.

These are not the same funds as those provided under Greece’s formal bailout and not something which we have seen Greece use before, suggesting Greece’s cash position is particularly stretched.

German bond prices have fallen and yields have risen – we see this as being the single-most important driver of the euro at the current time. It also suggests to us that within the bigger picture of global currency flows the issue of Greece continues to lose importance.

Watch Germany and watch fundamental economic drivers if you want to know what is driving the shared currency.