The Pound to US Dollar exchange rate (GBP/USD) twice rose towards technical resistance at 1.5380 yesterday, but twice failed to sustain itself above this important level. Sterling was boosted by another stream of positive domestic data releases, but support for the UK currency remained tainted by fears that this morning’s BoE Quarterly Inflation report could devalue the Pound.
Sterling’s attempted rallies against the ‘Greenback’ came in response to a number of better-than-expected economic readings, the most important of which was a report from the Office for National Statistics showing that UK Industrial Production grew by 1.1%, and Manufacturing Production expanded by 1.9%, during June. The over-achieving print completes a full set of positive UK Manufacturing growth in June. Factoring in the robust 54.6 PMI print it is now apparent that all 13 categories of the British Manufacturing Sector improved during June, something that has not happened since 1992.
Halifax reported that UK House Prices advanced at an annual rate of 4.6% in the three months leading up to July as the government’s new Help to Buy scheme improved prospects for Britons looking to get on the property ladder. With House Prices accelerating at the fastest rate since August 2010 some analysts are worried that a bubble is forming but in the short-term, or at least until the bubble bursts, the rising housing market is likely to lend the Pound a helping hand.
The British Retail Consortium announced yesterday that Retail Sales Volumes increased by 3.9% in July, marking the strongest July performance since 2006. Food and drink sales soared inline with the rising temperatures as UK consumers indulged in barbecues, picnics and garden parties, which had a massive impact on Retail Sales. The arrival of the ‘Royal Baby’ was also perceived to have a positive effect on consumer confidence.
The UK’s optimistic data stream was completed as the Society of Motor Manufacturers and Traders released a report showing that Car Sales surged higher by 12.7% in July. The 17th consecutive monthly rise was accompanied by an upward revision to the 2013 forecast; it is now predicted that 2.2 million units will be sold this year.
In terms of American releases, the US Trade deficit shrunk to its lowest level since 2009, as June’s print came in at -$34.2 billion, down from -$43.5 billion in May. The encouraging Trade Balance report means that US second quarter GDP could be revised higher by up to 0.8%.
Later this morning the Bank of England will announce its outlook for inflation in the second half of 2013 and the Central Bank is also expected to commit to some form of ‘forward guidance’. The BoE is keen to convince businesses that interest rates are set to remain low for a prolonged period of time, with a hope that this will encourage further investment in the British economy, which could lead to more jobs and higher wages. However, the consequence of low interest rates is depressed profits for holders of the UK currency, and a commitment to loose monetary policy has the potential to derail Sterling’s recent rallies.
If an Unemployment or nominal GDP threshold is set then GBP/USD is likely to decline, possibly sliding back down below 1.5100 over the next few weeks. However, if markets interpret the BoE’s tone to be more positive then the possibility exists that GBP/USD could take advantage of the recent run of robust domestic data releases and break through significant resistance at 1.5380.
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