Spooked Pound Falls and Erases Gains Following Strong Manufacturing + Trade Data Releases
Pound to Euro exchange rate is today at 1.1710 while the Pound to Dollar exchange rate is at 1.2450
The Pound put in a decent rally in the morning of Friday February 10 only to see its gains reversed in early afternoon.
The turnaround in fortunes for the UK currency raised some eyebrows as it comes despite the release of some unambiguously strong economic data.
We don't quite know yet what has spooked the Pound but it does suggest to us that markets are simply not interested in buying the currency as long as the question marks surrounding Brexit continue to loom large.
The Brexit story is a stale one at present and we had anticipated data and interest rate expectations to grow in importance. Indeed, this view was looking to be the correct one as the Pound rallied in the wake of the release of good data earlier in the day.
Pound Sterling edged higher after the Office for National Statistics (ONS) released industrial, manufacturing and trade data that came in well ahead of analyst expectations.
- Manufacturing Production for December: 2.1% vs 0.5% expected, up from 1.4% seen in November.
- Industrial Production for December: 1.1% vs 0.2% expected, down from 2.0% in November.
- Trade Balance for December: -10BN, vs -11.50BN expected, down from -11.56BN in November.
These data are actually quite extraordinary if we consider most commentators and economists were expecting a slowdown.
The ONS reports that growth in manufacturing is now running at a pace last seen in 2007 and hints at an economy that is rebalancing away from being dependent on imports.
Within manufacturing, pharmaceuticals, basic metals and transport equipment were the main contributors to growth.
The increased level of exports compared with the same month on a year ago was a factor in the increases in
pharmaceuticals and motor vehicles, trailers and semi-trailers within transport equipment.
The ONS reports an increase in exports for the duration of 2016 but there was a notable bump in the final quarter, which would certainly be due to the cheaper Pound.
Exports to the EU and non-EU countries increased:
Analyst Scott Bowman at Capital Economics says the latest data points to the UK economy becoming more balanced:
"There was some more encouraging signs of a boost from the lower Pound in the trade volumes figures. Indeed, quarterly growth in goods exports volumes accelerated from -4.9% in Q3 to 7.1% in Q4, and growth in goods import volumes slowed from 3.8% to -0.4%.
"This suggests that net trade should have made a positive contribution to GDP growth in Q4 after subtracting an average of 0.6ppt in the first three quarters of the year."
Neil Wilson at ETX Capital reflects that the EU is becoming a smaller part of Britain’s export market.
"So much for the Brexit meltdown – today’s data confirm that the UK economy remains very resilient and lends support to the Bank of England’s decision to revise up its 2017 growth outlook."
Pound Heads Higher
The reaction by Pound Sterling confirms a shift in how foreign exchange markets are viewing the Pound.
Since the June referendum moves in the UK currency almost exclusively driven by sentiment surrounding Brexit.
However, the fall following the Bank of England’s Inflation Report suggests interest rates, and therefore economic data, is starting to be considered by traders once more.
This trend was further enforced when Sterling recovered after MPC member Kristin Forbes said she believes a rate rise was now warranted.
“Whilst we expect the Trump trade to remain strong, this morning’s better than expected number will surely see the Pound rally against the Euro," says Paul Sirani, Chief Market Analyst at Xtrade.
"The pound jumped after manufacturing production figures beat expectations easily and provided another reason to be upbeat about the UK economy. But at $1.25 cable is still trading virtually flat on the day and is about 0.8 cents shy of yesterday’s high. Whatever data we get the pound is completely shackled by the politics at the moment," says ETX Capital's Wilson.
