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Manufacturing Production data released last  week matched expectations, posting a disappointing +0.1%. This seemingly confirmed worries that slow growth in the Eurozone could be a drag on the UK recovery.

The Eurozone is the UK largest trading partner and slower economic turnover in the region would naturally impact demand for the exports of countries which it trades with. Weaker manufacturing output would be one of the first places that any impact might manifest, after which there could be a spillover effect on GDP and employment.

The threat of slack in exports eases pressure on the Bank of England (BoE) to hike interest rates and has weighed on Sterling this week. The British Unit has retreated from multi-year highs against the Euro this week, as well as conceding ground against major currencies including the Swiss Franc and Japanese Yen. The BoE could start to back away from its current interest rate guidance in the coming weeks and months should there be additional evidence that weakness in the Eurozone is putting the UK recovery at risk. In turn it would be unsurprising to see Sterling suffer further losses.

In the world central banks, both the BoE and US Federal Reserve (Fed) made announcements this week. The monthly BoE monetary policy announcement came and went as expected. Namely that no changes were made to existing simulative measures, and thus was accordingly ignored by markets.

The Fed on the other hand attracted significant of interest when the minutes from its most recent policy meeting were released. The report came with a bit of a dovish tone, including comments that global economic weakness is a risk to the stability of the American economy and thus a concern to the Fed’s rate setting committee. Additionally, there was discussion that any future monetary policy changes will have to take the global economic landscape into consideration. Currency markets took this to mean that interest rate hikes might not occur as soon as expected and therefore shed USD positions.

The reality is that the global economic landscape has always been a point of consideration for the Fed and the content of the minutes does not represent anything that materially changes the outlook for this Greenback. As such this pull-back in USD feels knee-jerk and could be transitory in nature. In fact the Big Dollar has already reclaimed most of its Fed related losses against both Euro and Sterling. Leaving both EURUSD & GBPUSD trading near cycle lows.

There are a couple of key British data releases next week, including the September Consumer Price Index (CPI) Tuesday, followed by employment statistics on Wednesday. Expectations are that prices expanded a disappointing +1.4% last month, against last August’s reading of 1.5%. CPI is the BoE’s favoured measure of inflation, for which maintains a target level of 2.0%. Given the importance of CPI with respects to monetary policy, specifically interest rates, there tends to be elevated volatility leading up to and immediately following the announcement.

Inflation in the UK has trended lower since late 2013, when it was near 3.0%, and has become one of the most talked about events on the data calendar. Observers will be scouring data on Tuesday for evidence that recent domestic economic expansion is injecting stability into prices growth and that the trend of declines in CPI is starting to reverse. Though as above it’s likely that they will be left wanting. Any indication of additional weakness in inflation would cast doubt on the schedule of expected BoE rate hikes, which in turn could threaten Sterling; GBPUSD being particularly sensitive to this risk.

Lately employment statistics garner nearly as many newspaper headlines as CPI following the emphasis the BoE has placed on Wages Growth as a contributory factor in economic slack. The consensus forecast is that 33k less people in the UK claimed jobless benefits during the month of September. Data is also expected to show that unemployment in the UK dropped to 6.1% for the month of August, a near 6-year low. Meanwhile, the all-important Wages Growth number is forecast to bump up by one notch to +0.7% from last month’s reading of +0.6%. An expansion in Wages will be most heavily anticipated element of Wednesday’s data and could see markets shrug off the other employment results, even if they diverge. A strong number would go a long way to increase market confidence in the BoE’s interest rate guidance and likely see Sterling advance .

For more, see the GBPUSD forecast.