Buy Pound Sterling Weakness say Contrarians Swissquote Eyeing Upcoming Manufacturing Data Release

• Quotes:
• Pound to Euro exchange rate today: 1 GBP = 1.1059 EUR
• Pound to Dollar exchange rate today: 1 GBP = 1.2958 USD

The British Pound is a 'buy on an dips' according to analysis from a leading Swiss-based financial services provider in what amounts to a contrarian view on the under-pressure currency.

Analyst Yann Quelenn of Swissquote Bank is eyeing the release of manufacturing data on Thursday, August 9 as offering an opportunity for a rebound in the value of Sterling.

Unlike many other foreign exchange commentators who are becoming increasingly bearish on the Pound, Quelenn appears to be more constructive on Sterling’s outlook, particularly against the US Dollar.

Amidst a summer lull in volatility on currency markets, “it feels like that one little piece of information may ignite markets,” says Quelenn.

As such, “any new UK data are important in the coming situation as Brexit negotiations are currently happening. Indeed, those data also reflect the overall sentiment and fears of economic players in the UK economy. Tomorrow’s data should see industrial production approaching the flat annualised growth rate of 0%.”

May data showed a decline in activity with a reading of -0.2% for manufacturing and economists are forecasting a small improvement in the data to 0%. Disappointment will likely see Sterling suffer further, but this is could offer the perfect buying opportunity, for the brave at least.

Swissquote believe markets “still overestimate the Brexit impact. Proof is that the predicted collapse did not happen and won’t likely happen.”

“In our view, any UK soft data is another opportunity to buy the Pound in the dips,” says Quelenn.

Above: A recent trend higher in GBP/USD has pulled back sharply

Quelenn believes that while the Pound is likely to dip slightly from its current level of around 1.30, it should ultimately continue to climb out of its nadir - reached in January 2017 - at around 1.20.

For Quelann the broader trend higher in GBP/USD is alive but it is notable that he has avoided making a similar call on GBP/EUR which has been in a concerted downtrend of late.

So focus will be on reports of domestic activity in the shape of external trade, construction output and industrial production releases for June.

For the latter, in the preliminary estimate of Q2 GDP, the ONS 'guessed' that industrial production rose by just 0.1%m/m, within which manufacturing output is estimated to have fallen by 0.2%m/m.

While the official data on manufacturing have for some time failed to reflect fully the optimism captured by the PMI, "we are a little sceptical that manufacturing activity had such a poor end to Q2 and we look for a monthly rise of 0.2% in June. Mechanically, that points to 'some' upside risks to the industrial production print," says Robin Wilkin, an analyst with Lloyds Bank Commercial Banking.

However, for Lloyds, the big upside risk surrounds the ONS’ assumptions for oil extraction activity.

Due to a shift in seasonal maintenance schedules, oil extraction is likely to have posted a much smaller fall this June than is the seasonal norm around this time of year.

After seasonal adjustments, this should show up as a big rise in oil extraction in today’s report.

"Which - combined with modest strength in other areas of production - supports our call for a 1.4% rise in June industrial output. More broadly, that would also raise the prospect of GDP growth in Q2 being revised up to 0.4% from 0.3%," says Wilkin.

Such an outcome would certainly be positive for Sterling in the short-term.

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But then Again, the Euro is Looking Overbought

We mention the Pound is in a concerted downtrend against the Euro, but we would also point out that there is a sense that the Euro is ripe for a pullback against the Pound and Dollar.

Note, we say pullback - we are not suggesting a complete reversal in fortunes.

The rally higher in EUR/GBP has been strong and some would advocate that now is not the time to bet on further strength.

“The EUR has been supported since the start of the week. However, with speculative oriented investors’ selling interest in the single currency rising and as there is limited scope of policy differentials diverging further to the benefit of majors such as EUR/USD, we advise against buying at these levels,” says Manuel Oliveri at Credit Agricole.

Micaella Feldstein at Natixis also identifies the Euro as being ripe for a correction saying the EUR/GBP exchange rate, "can rally further but we see profit takings against 0.9089/98."

We also note that latest data from the US Commodity Futures Trading Commission suggest traders are now getting wary of adding to the substantial pro-Euro bets that already exist in the market.

As such, the Euro could be ripe of reversal.

We would warn that getting involved in any market on the promise of a pullback is incredibly tricky, particularly when doing so within short-term timeframes.

Handle the Euro with caution if you are intending to go against the dominant trend.