Sterling falls on poor data; markets focus on MPC rate decision

Tom Tong07/Apr/2011Currency Updates

GBP

Yesterday saw sterling weaken across the board as a result of exceptionally weak economic data. The release of both industrial and manufacturing production numbers came as a major setback to sterling. At 09:30 the bad news struck as manufacturing production figures came in flat against an expected rise of 0.6%, and industrial production showed a monthly decline of -1.2% as opposed to the expected +0.4%. Sterling rapidly declined across the board by over 0.5% halting the progress that had been made earlier this week off the back of far better than expected service sector PMI data. Sterling ended the UK trading session 0.4% down against the euro and down 0.1% against the dollar.

The main market focus will be on the Monetary Policy Committee’s interest rate decision at 12:00. Despite the inflationary pressures on the UK economy, the mandate to fuel growth from low borrowing rates is likely to prevail again this month with the decision expected to come in unchanged.

EUR

Yesterday saw the euro gain 0.4% against the pound due to the sterling negatives described above. Meanwhile against the dollar the euro gained around 0.3%. Despite Portugal’s credit rating being officially downgraded by Moody’s yesterday the euro seemed to take support from the growth of German Factory Orders coming higher than expected, printing at +2.4% on a monthly basis against expectations of 0.6% monthly growth.

There has been general bullish sentiment towards the euro over the past month, largely fuelled by Trichet and other European Central Bankers releasing comments that strongly suggest that a rate hike will happen at the ECB rate meeting today. This has been priced into the market for some time – both the ECB and Trichet in particular will look somewhat silly should they fail to deliver at 12:45. The other key Eurozone data to watch will be German Industrial Production, due at 11:00; this is expected to show 0.6% monthly growth.

In sovereign debt news it was announced this morning that Portugal is to be the third EU country requiring a bail-out estimated at 70Bn – 90Bn euros.

USD

The dollar was subject to an uneventful day in terms of key economic data yesterday, with the only vaguely significant data release being crude oil inventories. As a result the dollar was marginally up by 0.1% against sterling and slipped by 0.3% against the euro. Any volatility was driven by yesterdays’ respective weakness in sterling and marginally strong euro.

Tomorrow the main data release to watch out for on the dollar is the US Unemployment Claims number, which is due at 13:30 and is expected to come in at 385k. Outside of this expect any movements on the price of the greenback to be driven by any volatility driven by today’s interest rate decisions.

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Written by Tom Tong

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