Pound Boosted by Industrial Production Strength

The pound to euro exchange rate (GBPEUR) should retain an upside bias as industrial production data confirms the UK economy remains in good health.

The Bank of England have indicated they are no nearer to raising interest rates than they have been at any time over recent months.

Without any sign of higher rates on the immediate horizon the British pound saw support provided through the mid-week session fade.

The pound sterling to euro exchange rate has fallen below the 1.36 line of support once more confirming this area to be particularly difficult to navigate.

The 1.36 is a significant support and resistance zone. We warned yesterday that the GBP/EUR would struggle to breach this important area of resistance, which has proven true.

The move lower on Thursday has not been enough to convince us that the pound sterling has been shifted into reverse once more, indeed we could well see some consolidation at these levels before the pair decides on its next move.

We see support lying back at the October lows at around 1.3450 and would suggest a substantial break-down in confidence towards sterling will be required to break below here.

Our bias is for the upside to resume and a target of the upper end of the September range at 1.28 seems appropriate.

(Note the above quotes represent the inter-bank market, your bank will affix a discretionary spread when conducting international payments. An independent provider can get up to 5% closer to the market, delivering up to 5% more currency in some instances. Find out more).

UK Industry Gives Optimism Longer-Term, Germany Slowing Down

The Eurozone’s industrial powerhouse appears to be slowing down while the UK’s industrial sector revs up.

German industrial production for August slumped 1.2% - analysts had forecast growth.

Meanwhile, UK industrial production surprised analysts with a reading of +0/5%, markets had expected a lower number.

The distinction between the two economies on roughly comparable data saw the pound sterling leap.

At the time of writing the pound to euro exchange rate is trading 0.75% higher on a day-to-day comparison having reached 1.3614.

The pound to dollar exchange rate was meanwhile seen half a percent higher having reached 1.5304.

The data has allowed the pound to break through and above the 1.36 support zone following the fall below this key level earlier in the month.

1.36 now becomes support while we would expect 1.38 to become an achievable target should positive sentiment continue in the near-term.

British Economy Shows its Resilience

The talk in economic circles at present remains the slowdown in Chinese growth - how will it impact the global economy?

It would appear that the Chinese slowdown is yet to hit the UK which remains a relatively insulated to China.

It is however worth pointing out that the ‘manufacturing’ sector is broad with some components doing better than others.

The ONS notes that, “the UK’s comparable strength was concentrated in the manufacture of ‘chemical products’, which was offset by relative weakness in the manufacture of ‘machinery & equipment not else classified’.”

German Economy Slows, Undermines Long-Term Outlook for the Euro

The decline in German economic activity will come as a shock to those expecting the Eurozone economy to now be on a positive footing.

From a currency perspective this data reading is seen as another reason why the European Central Bank (ECB) should consider expanding its asset purchase programme.

Whenever currency traders get a hint of such an expansion the euro is sold.

Interestingly, it was exactly a year ago when we were reporting on the same situation - the euro was falling as gears grew over the strength of the German economy and the prospect of ECB quantitative easing being introduced.

History shows that the ECB does react to German economic weakness, and could therefore do so again.

“It remains to be seen whether this month’s data print represents a mere blip or a genuine loss in momentum––the timing of school holidays can often exacerbate the inherent volatility of this series at this point of the year,” says Timo del Carpio, European Economist, RBC Capital Markets.

Moreover, the relative resilience of contemporaneous survey indicators for Germany may offer some consolation; RBC’s PMI-based measure in fact continues to point toward growth of 0.5% q/q.

del Carpio believes the German economy to benefit from robust domestic demand as well as the sustained recovery elsewhere in the currency block

“For now, however, this release offers an unwelcome warning sign of slowing in momentum over the latter half of the year,” says del Carpio.

 Bank of England: No Rate Rises

The UK central bank has opted not to raise interest rates at its October meeting.

The minutes noted the “range of views” on the Committee about the outlook for inflation and activity.

A prominent line in the minutes was that some members noted “recent evidence that lags in the response of inflation to interest rate changes appeared a bit shorter than previously thought”.

This is “dovish” as it suggests the MPC can play off the back foot.