Last Updated: 04 April 2014
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By Gary Howes
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"Weaker than expected output of the industrial sector and a surprise drop in construction industry output in November suggest fourth quarter economic growth could come in lower than the surveys are indicating. Nevertheless, the economy remains firmly in recovery mode, and a rebound from this current bout of weakness looks likely in coming months."
The value of Sterling is closely related to the UK economic growth picture, so further gains will be dependent on this growth.
"GBPCAD continues to grind out fresh, new cycle highs and is nearing the 1.80 area through the close of the week. The consolidation that took hold of the cross through December failed to generate any strong corrective pressures lower and the broader bull trend remains soundly and deeply entrenched across a range of time frames, according to the trend strength oscillators.
"We still target 1.80/1.82 as a near-term objective for this move up but we also think the overall trend is likely to persist higher for quite some time (1.8170 is the 38.2% retracement of the 2.35/1.48 drop, 1.92 is the 50% retracement)."
"Monthly estimates of GDP suggest that output grew by 0.7 per cent in the three months ending in December after growth of 0.8 per cent in the three months ending in November 2013. These estimates suggest the economy expanded by 1.9 per cent in 2013, up from 0.3 per cent in 2012.
"The level of GDP is now just 1.2 per cent below its pre-recession peak (January 2008). The economy is expected to expand at a reasonable pace in 2014.
"The National Institute interprets the term "recession" to mean a period when output is falling or receding, while "depression" is a period when output is depressed below its previous peak.
"Thus, unless output turns down again, the recession is over, while the period of depression is likely to continue for some time. We do not expect output to pass its peak in early 2008 until 2014."
"With UK industrial production data disappointing, rather than revealing the solid gain that was expected today, EUR/GBP may rebound modestly in the short-run. The broader trend here remains lower though, given the overall trend towards stronger UK growth and conditions that linger close to recession in the Eurozone. We expect further EURGBP gains to be capped in the low/mid 0.83 area."
The unemployment rate rose to 7.2 per cent for the final month of the year, compared with 6.9 per cent in November.
Economists had expected the economy to add 14,600 jobs and the unemployment rate to hold steady at 6.9 per cent, according to estimates compiled by Thomson Reuters.
The below graph shows the incredible volatility in the GBP/EUR following the release.
Non Farm Payrolls - Net Change, United States, Jan Figure released at 74, Forecast: 194, Prev: 203.
"Confusing release, with the participation rate falling, unemployment rate dropping drastically and NFP tanking. Doubt Jan taper will happen," says Joshua Mahony at Alpari UK.
Boris Schlossberg at BK Asset Management reflects on today's data surprise:
"UK Industrial Production missed its mark printing at 0.0% versus 0.4% eyed and sending cable to session lows in morning London dealing as the pair tested support at the 1.6400 level. This is the third major data point this month that has printed below consensus view suggesting that growth in UK economy may have peaked in Q4 of last year.
Some analysts have called on the BoE to move away from its ultra-accomodative monetary stance given the surprising strength of the UK economic recovery and have even called on the MPC to raise rates in 2014. However as the most recent UK data has shown with both the PMI Services and Manufacturing reports and now the Industrial Production numbers, growth is beginning to decelerate and that is likely to keep the BoE policy stationary for the time being.
Gross Domestic Product s.a. (YoY) (Q3) came in at -0.4% - in line with expectations.
Gross Domestic Product s.a. (QoQ) (Q3) came in at 0.1% - in line with expectations.
So no surprises here. It is surprise that drives currencies; hence why GBP is being sold off and the EUR isn't.
Industrial Production (YoY) (Nov): +2.5%, expectations were for +3.1%.
Industrial Production (MoM) (Nov): 0%, expectations were for +0.4%.
Manufacturing Production (MoM) (Nov): 0%, expectations were for +0.4%.
Manufacturing Production (YoY) (Nov): 2.8%, expectations were for +3.3%.
Will this trigger a deeper move lower or is this offering traders better entry points to buy into the pound sterling?
Analyst Geoffrey Yu is bullish on the GBP/USD: "While support holds at 1.6317, there’s scope for more upside. Resistance is at 1.6502 ahead of 1.6622."
He is bearish on the EUR/GBP: "The cross extended its bearish price pattern of lower highs/lows, indicating further downside in the near-term. The next strong support is at 0.8160.Resistance is at 0.8332."
However, some market forecasters saw risks the Bank could release of an accompanying statement, which they argued would prepare the market ahead of the February Quarterly Inflation Report for potential adjustments to the Bank's forward guidance.
"Therefore the lack of statement eased market concerns and prompted an initial GBP upmove. Industrial production data released today may see some interest. The market is expecting output to have risen by 0.4% m/m, our economist view marginal upside risks which would, at best, provide some support for GBP. Our view is that moves in GBP/USD will likely be largely dependent on this afternoon's US labour market update." - Lloyds Bank Research.