Pound Stronger on Industrial Production Data but Economic ‘Slack’ Remains

The British pound sterling has struggled through June but figures released mid-week could well be the catalyst to provide some much-needed support.

The Office for National Statistics has reported on Wednesday that Industrial Production (MoM) (Apr) grew at 0.4%, well ahead of the 0.1% expected.

The beating of expectations has particularly helped the pound v euro exchange rate pairing which has struggled for much of June.

We do however report here that the EUR-GBP pair could be about to turn direction based on technical factors alone. If anyone thought technicals were of little importance then they need to read this example of concrete corporate action based on technical considerations.

The Industrial Production data could well be the catalyst that enforces a new move that favours sterling.

While the headline figure regarding Industrial Production was helpful to the pound sterling we note there were some negatives which will keep buying interest capped.

Manufacturing output decreased by 0.4% in April 2015 compared with March 2015, according to the ONS the largest contribution to the decrease in manufacturing came from basic pharmaceutical products & pharmaceutical preparations.

There is still evidently a degree of slack remaining in the economy - “in the 3 months to April 2015, production and manufacturing were 9.5% and 4.4% respectively below their figures reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008,” report the ONS.

This means that economic growth can continue before strains are placed on the UK’s economic/financial system - this ‘slack’ is closely watched by the Bank of England which said it would only raise interest rates when this slack is eradicated.

For the British pound the decision to raise interest rates at the Bank of England remains the single most important driver of strength.

As such, we see no game-changing news pertaining to the pound expressed in the industrial data released mid-week but it does confirm that the direction being taken by the economy remains positive and by early 2016 the conditions required for higher interest rates will arrive.