Pound can’t afford more disappointment
UK industrial production printed well below consensus forecasts with a 2.7% decline for April and a plunge in auto manufacturing output triggered a 3.9% drop in manufacturing output, the sharpest drop since 2002. Year-on-year, Industrial production declined 1.0% which fed into a sharp 0.4% decline for monthly GDP, the biggest drop since March 2016, and the quarterly gain remained at 0.3% growth. Although the drop in auto manufacturing was already known the data reinforced a lack of confidence in the growth outlook and Sterling weakened. NIESR also projected that GDP would decline by 0.2% in Q2 which also undermined sentiment.
Sterling dropped to near 1.2650 on the Dollar before a modest recovery and the Euro hit resistance pushing below the 1.1200 mark. The Bank of England’s (BoE) Mike Saunders stated that 2% is the neutral rate for UK interest rates and a return to those levels will likely happen sooner than expected. He also stated added that the committee does not necessarily need to wait for Brexit uncertainties are resolved. Sterling sentiment remains fragile and opens this morning near 1.2680 against the Dollar and the Euro near 1.1210. UK Labour market data will be key, with further negative surprises likely to cause further Pound selling.
The Dollar gained net support from reduced fears over the economic outlook following president Trump’s decision not to impose tariffs on Mexico. There were no comments from Federal Reserve (Fed) officials with the blackout period in force ahead of next week’s policy meeting.
The JOLTS job-openings data recorded a slight slowdown to 7.45mn for April from 7.47mn the previous month. Hires also increased at a faster pace which continued to indicate a strong labour market. The Dollar was able to make net gains as immediate fears eased and the Euro tested support below 1.1300 before closing just above this level.
Bank Holidays in Germany, France and Switzerland yesterday meant activity was relatively subdued. Weekend reports that the European Central Bank (ECB) would consider further action to cut interest rates if the economy stagnates again in the short term unsettled the Euro. Italian industrial production printed weaker than expected which reinforcing unease over the underlying growth conditions but there was some protection when the gap between the US and German two-year bond yields dropped to the lowest since late 2017. The Euro tested support below 1.1300 as Dollar sentiment improved but closed just above this level.
Data to watch:
08:30 GBP Claimant Count Change (May)
08:30 GBP Average Earnings Excluding Bonus (3Mo/Yr) (Apr)
08:30 GBP Average Earnings Including Bonus (3Mo/Yr) (Apr)
08:30 GBP ILO Unemployment Rate (3M) (Apr)
12:30 USD Producer Price Index ex Food & Energy (YoY) (May)
22:45 NZD Electronic Card Retail Sales (MoM) (May)
23:25 AUD RBA’s Kent speech
23:50 JPY Machinery Orders (MoM) (Apr)
23:50 JPY Machinery Orders (YoY) (Apr)