Sterling gains for a third day on strong industrial output figures

Enrique Díaz-Álvarez11/Jun/2015Currency Updates


The UK currency was buoyed on the back of impressive industrial output data for April released yesterday morning, with Sterling ending trading 0.5% higher on both the Dollar and the Euro.

Production in the industrial sector of the British economy increased by 0.4%, above the 0.1% that was forecast, after output in oil and gas surged in April. Oil and gas extraction jumped by 8.7%, the biggest increase in more than a year. However, the report, released from the Office for National Statistics, painted a mixed overall picture of the UK economy. Manufacturing production surprised markets by contracting 0.4% for the month, highlighting the country’s heavy dependence on domestic consumption. This decline was driven in part to a 6% decline in pharmaceuticals output, which accounts for almost a tenth of overall manufacturing. Prospects for production in the second quarter are now fairly subdued, especially given signs that the Eurozone recovery is losing some steam. Encouragingly, however, the National Institute of Economic and Social Research upped its growth estimate for the three months to May, from a revised 0.5% in April, to 0.6% in May.

Market reaction in the Pound today will likely centre on fallout from yesterday’s strong output data, and last night’s speech from Bank of England Governor Mark Carney.


The single currency traded within a narrow band against the Dollar for much of the day yesterday, ending 0.1% down, despite a lack of data in the Eurozone.

Attention was again on Greece. It was reported that Germany’s Chancellor Angela Merkel may be satisfied with Greece committing to at least one of the economic reforms put forward by creditors, in order to open the door to the crucial bailout funds. The German Government is still insisting on a package of steps, although such comments suggest creditors may be more flexible when it comes to securing a deal with the Greek Government before the end of the month deadline. Elsewhere in the Eurozone, industrial output in France disappointed, plummeting by almost one percent in April, while the same measure in Italy also declined unexpectedly.

There are no major Euro-wide economic announcements this morning. France will be releasing its inflation figures and latest nonfarm payroll data before markets open; however, Euro traders will instead await key data across the pond.


The US Dollar dipped marginally against its major peers by 0.2% following a strong Pound and, more critically, a sharp rally in the Yen.

Only a few smaller data releases to report in the US. Mortgage applications, a historically volatile measure, increased last week, up by 8.4%, its largest weekly increase since mid-March. Meanwhile, the US posted a budget deficit of $82.4 billion in May, down a sizable 37% from the same period last year, according to the US Treasury Department. With little news driving the Dollar, focus among traders shifted to speculation surrounding the timing of the Federal Reserve’s first interest rate hike, ahead of next week’s monetary policy statement.

The crucial release of monthly retail sales will take place in the US this afternoon. Market expectations for the headline figure have edged higher in the past week. Consensus, of a 1.1% increase month on month, would mark the largest increase in the measure in over a year, and likely lead to a rally in the Dollar.

Rest of the world

The Japanese Yen surged against the US Dollar on Wednesday morning after Bank of Japan Governor Kuroda claimed the country’s currency was weak and unlikely to fall further, even when the US hikes interest rates. The Yen surged by around 1.3% as markets reacted to the apparent market intervention, with the Governor warning of diminishing returns to QE and claiming its current stimulus program is impacting fiscal plans. Such comments suggest that we’ll see no additional stimulus from Bank of Japan, both this year and in 2016.

Market alert

Special mention goes to the massive overnight drop witnessed in the New Zealand Dollar (NZD). The Reserve Bank of New Zealand surprised markets with a 0.25% cut in the OCR rate; most economists had predicted unchanged rates at 3.5%, though a small minority were expecting the cut. More shocking, the rate cut came even as the RBNZ revised upward its inflation forecasts in the accompanying Monetary Policy Statement. This means that the Central Bank has become far more concerned with growth than inflation. The main justification offered for the aggressive move was the fall in dairy prices, a key New Zealand export, which has, in turn, lowered the country’s terms of trade. The statement was thoroughly dovish. It stated that NZD was still overvalued and that further cuts are in the pipeline.

This move validates our forecasts for a much weaker NZD in the coming months. The massive drop in the currency has left it roughly at our forecast for the third quarter of this year. As the smallest economy in the G10, the knock-on impact on other currencies should be limited, but we do expect to drag it the Australian Dollar (AUD) somewhat lower as well.


Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.