Soft UK Production and Strong U.S. Jobs Data Weigh on Sterling

Sterling is trading under pressure in the wake of UK production data that disappointed and stronger than expected U.S. payroll data that beat expectations.  There were positive revisions to the jobs data, which revealed that the prior two months were actually stronger than expected giving the dollar a lift. The combination of stronger than expected U.S. data and weaker than expected UK data has not gone unnoticed in the currency market and has weighed on the GBP/USD currency pair. The GBP/USD has rallied over the past week but appears to have formed a top.

UK Production Disappointed

UK production, trade and house price data disappointed. Headline industrial output unexpectedly shrank, by 0.1% month over month and by 0.2% year over year versus the respective median forecasts for 0.3% month over month and 0.2% year over year growth. The May figures marked the fourth straight month that industrial production has undershoot consensus expectations. The narrow manufacturing production figure contracted by 0.2% month over month, well off the median forecast for a 0.5% month over month rise, while the year over year comparison rose by 0.4%, less than half the 1.0% growth expected.

The UK trade deficit, meanwhile, blew out more than expected in May, to GBP 3.8 billion in the total trade figure. The median forecast had been for a GBP 2.5 billion deficit. The June Halifax house price report also showed a 1.0% month over month decline. This following an unexpected deceleration in PMI survey evidence for June, and altogether compound concerns that the economy heading into stagnation.

Two of the three BoE MPC members who voted to hike in June spoke Thurday Saunders, who joined the MPC just last August, advised UK households to “prepare for higher interest rates.” He explained that there is now less people coming from the EU than before the Brexit vote, presumably meaning that wage pressures could start to build, while saying that he expects the rise in exports and investment will “roughly balance” the consumer slowdown. His MPC colleague McCafferty said that “we would expect to see a couple of modest rate rises over the next couple of years or so.” Both members voted for a 25 basis point hike in the repo rate at the June MPC meeting, which has limited the impact on sterling markets to a degree, which are eager to see if other members are shifting to their position and tip the vote balance.

U.S. Payrolls Surged

U.S. nonfarm payrolls increased 222k in June after rising 152k in May which was revised form 138k and 207k in April which was revised from 174k, for a net 47k upward revision. The unemployment rate edged up to 4.4% versus 4.3% previously. The labor force rebounded 361k following the prior 429k drop, while household employment climbed 245 from the prior -233k. The labor force participation rate improved to 62.8% from 62.7%. Average hourly earnings were up 0.2% last month versus May’s 0.1% gain (revised from 0.2%). The workweek increased to 34.5 from 34.4. Private payrolls increased 187k, with the goods producing sector adding 25k, while jobs in manufacturing inched up 1k, and construction up 16k. The service sector added 162k workers. Government jobs rose 35k. The strength in the report will keep the FOMC on its normalization path.

The GBP/USD is forming a top and has sliced through support at the 10-day moving average at 1.2915.  The exchange rate is now poised to test an upward sloping trend line that comes in near 1.2750.