Talking Points
• Japanese Yen: Above 105.00 as equities firm
• Euro: EZ Retail Sales slip –0.4%
• Pound: IP craters sending cable lower
• US Dollar: Non-Farm Productivity on tap
UK Industrial Production missed badly printing at –0.5% versus forecasts of just a small decline of –0.1%. The much worse than expected results from the UK industrial sector sent pound tumbling to an 11 week low and raised the possibility that the BoE may be forced to lower rates another 25bp at tomorrow’s meeting of the Monetary Policy Committee.
While consensus estimates call for UK monetary policy to remain stationary keeping rates at 5%, tonight’s weak results from UK manufacturers suggest that the UK economy may be decelerating far faster than most analysts expected. The news is especially troubling for UK monetary authorities because manufacturing was considered to be the one bright spot in the UK economy with UK producers enjoying the benefits of record high EURGBP exchange rates which helped them to gain a competitive edge in the EZ market.
However, today’s news indicates that the last bastion of strength in the UK economy may have given way, increasing pressure on the BoE to begin easing sooner rather than later despite lingering concerns about inflation amongst most of the MPC members. In fact cable may test the 1.9500 figure later in the North American session if traders begin to anticipate a surprise rate cut from the BoE tomorrow.
Meanwhile, data from the EZ was not much better with EZ Retail Sales slipping to –0.4% from 0.1% expected as the region’s economy appears to be slowing significantly as well. With EURUSD having broken 1.5500 while GBPUSD threatens to fall below 1.9500, dollar bulls remain in full control at the start of this week as focus in FX markets shifts away from the troubles in US and squarely towards the economic slowdown across the pond with many traders starting to anticipate much more dovish monetary policies from both the ECB and the BoE in the foreseeable future. Tomorrow’s central bank rate announcements could tell the market if this analysis is right. For the time being dollar longs reign supreme.
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