Pound bruised following set of weak data

Summary:

• Manufacturing and industrial production fail to meet expectations in April
• UK trade deficit widens by a large margin, the median estimate pointed to a lower deficit
• GBP slips all of a sudden, GBPUSD falls seem contained, EURGBP could rise

A package of April data from the UK came in well below expectations sending the British currency broadly lower. However, risks of a prolonged downside move against the US dollar appear to be limited unlike the euro. Shortly after 10:00 am BST the pound is the second worst currency within the G10 basket.

Hard data for April disappointed suggesting the first quarter slowdown may not have been just one-off. Source: Macrobond, XTB Research

The major disappointment came from construction where production shrank 3.3% in a year-over-year basis in April while the market consensus had called for a 1.8% slide. Looking into the details one may notice that the largest drop was experienced in public infrastructure, but it was the case over the past months this year so it came as not a big surprise. On top of that, manufacturing production grew just 1.4% yoy falling short of expectations placed at a 3.1% increase, and all in all it meant a fall in terms of dynamics from 2.9% yoy seen in March. Industrial output increased 1.8% yoy following a 2.9% yoy rise in March while the street’s call suggested a 2.7% pick-up. By and large, all of these readings turned out to be much worse than expected, and as a result the pound slipped immediately against the US dollar as well as the common currency. Last but not leas, the trade data presented in a separate report showed the deficit widened substantially to 5.3 billion GBP in April as exports volume fell as much as 6.1%, the most since August 2014.

The massive shortfall implies that next exports could be a drag on GDP growth in the second quarter, albeit the jury is still out as two more reports will be released. Having said that, the similar pattern is seen elsewhere in Europe as well mirroring a weakening demand as the European economy may have already passed its peak in the ongoing business cycle. Keep in mind that the Bank of England perceives the first quarter slowdown as temporary caused predominantly by adverse weather conditions. But, looking at today’s numbers this view might be called into question unless we see a health improvement from now. Notice that even as a set of industrial readings proved to be really ugly retail sales along with consumer credit picked up in April, and given that it accounts for a lion’s share of the economy, growth should build momentum in the second quarter in general.

While downside risks could be limited when we mean the GBPUSD, the pound might lose a bit more steam against the shared currency. It’s especially true once the EURUSD regains bullish impetus in the wake of ECB and Fed meetings later this week. If so, a move toward 0.90 could be in the offing from where more sellers may seek to cash in on their bets. Source: xStation5