Trade and Production Figures to Define the Pound

It’s a big day for the Pound and this may seem more like a Mega Thursday when compared with last week’s Super Thursday, as the markets look ahead to this morning’s June manufacturing and industrial production figures, which are scheduled for release alongside June’s trade numbers.

There’s been plenty of talk over the UK economy and the effects of Brexit on growth prospects, but the economy has yet to fall into the abyss, despite the slowdown in the 2^nd quarter.

While unemployment numbers have been relatively resilient, with May’s unemployment rate having fallen to 4.5%, wage growth has taken a hit, which is not good news when considering the post EU Referendum surge in consumer prices.

The BoE’s Monetary Policy Committee has been torn since last August’s monetary policy easing decision on whether to control inflation or provide monetary policy support to the UK economy, with the weaker Pound expected to drive foreign investment and more favourable trade terms.

May’s trade deficit had been forecasted to see a significant narrowing, with the figures more than disappointing for the markets and the Pound.

Recent manufacturing and service sector PMI figures suggest that June forecasts for trade are on the optimistic side, with new orders and new overseas orders easing in both May and June from April’s peak. The weak figures also suggest that manufacturing production in June will also be on the softer side.

Weak numbers this morning, coupled with rising concern over consumer consumption stemming from Brexit uncertainty and rising consumer prices and softer wage growth, would certainly be supportive of the IMF and the BoE’s recent downgrades. The Pound will likely be hit hard should the figures disappoint, with any possible recovery over the near-term limited when factoring Brexit negotiations and the BoE’s current position on monetary policy, the Monetary Policy Committee having shifted from its hawkish position to a dovish one, signalling no rate hikes until the 3^rd quarter of next year at the earliest. It wasn’t long ago that 3 voting members dissented and the BoE’s Governor and Chief Economist both talked up the prospects of a rate hike.

At the time of the report the Pound was down 0.18% at $1.298, with sub-$1.29 levels more than a possibility if today’s numbers weigh and, while we have a negative view, positive numbers would certainly yield a relief rally over the near-term, though the short to medium-term outlook remains negative.

Later in the day, NIESR’s UK GDP estimate is also scheduled for release, though we will expect this morning’s trade and production figures to be the key driver.

Across the Pond, stats out of the U.S include the weekly jobless claims figures together with July’s producer price index numbers, with the Dollar likely to respond, economic data out of the U.S having been on the lighter side through the week, though the upside in the Dollar this week has had as much to do with the war of words between the U.S President Trump and North Korea’s Kim Jong Un, as U.S data.

News has hit the wires of the North Korean leader looking to launch an attack on Guam and the latest from Trump is that the Kim Jong Un regime will face a devastating military strike should the threats continue. The risk aversion hitting the markets will continue to support the Dollar, with the Dollar Spot Index up 0.14% at 93.688 at the time of the report, much to the relief of at least a few central banks including the ECB, with only the BoJ and the SNB likely to be hoping for a swift resolution, as appetite for the safe havens persisting.

Gold is up, as is the Yen and the Swiss Franc and more gains may well be on the horizon should tensions continue to mount.

With no material stats out of the Eurozone today, the EUR will likely take a break from its recent rally, the EUR currently down 0.2% at 1.1736, with sub-$1.17 levels reasonable should this afternoon’s stats out of the U.S impress and tensions continue to build.