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In the UK, focus will be on data for industrial and manufacturing production, due Wednesday. The British economy is only recovering slowly and Danske do not expect the January numbers to cheer the market. Industrial production posted a robust expansion in December (0.9% m/m). Given the further ascent in the CIPS, there is further upside potential. However, January (to be published on Wednesday 10 March) was characterised by extreme snowfall. (the worst snow for several decades). The CIPS surveys showed that the services sector was adversely affected, while the manufacturing survey shrugged off these effects. However, output could have been held back to a greater extent than surveys Admittedly, exceptionally cold weather is likely to have boosted demand for electricity and gas. But, after the robust rise recorded in December, January could be on a softer tone. In addition, past episodes of severe weather have tended to be associated with a temporary dip in manufacturing production. Focus will probably also be on remarks from the BoE that held the base rate unchanged and refrained from extending the asset purchase target in the past week but nevertheless has made the market nervous for additional QE efforts. Finally is the upcoming election getting more exiting as there seems to be a risk of ‘hung parliament’. Sterling has been under pressure in recent weeks which most likely can continue for while still. The risk of a hung parliament being powerless has further steered market attention to the risk of UK government debt being downgraded. The UK currently holds a top AAA rating, but a downgrade later this year is certainly a risk that will weigh on GBP. Finally, the risk of further quantitative easing has returned to the market, even though the latest monetary policy meeting did not move further in that direction. But new measures cannot be ruled out in the future. If they are carried out it will weigh heavily on GBP – not least in a situation where other central banks are clearly moving in the other direction, i.e. scaling back on liquidity and quantitative measures. Danske think sterling will come under further pressure ahead of the expected May election and expect EUR/GBP to hit 0.92 in three months’ time. But continue to expect GBP to appreciate once again in H2 10. Eventually, the UK economy will recover and furthermore sterling is the most undervalued currency in the G10 universe. Danske forecast EUR/GBP at 0.82 in 12 months’ time. Speeches by MPC members Barker, Haldane and Dale dominate the UK calendar next week and will allow us to gauge the MPC’s position on QE. Though recent commentary has been of a dovish nature, the context of a strong services PMI and optimism over a recovery in manufacturing may cool optimism over additional asset purchases. With no major data releases scheduled, MPC comments may dictate GBP flows. Some February data are due from the British Retail Consortium (BRC) and Royal Institute of Chartered Surveyors (RICS) and the better weather should have supported activity. Indeed, the CBI distributive sales survey was surprisingly strong in February and we should get a rebound in the new buyer enquiries index in the RICS survey, though the house price balance may be little changed. Overall, it looks as if the economy continued to expand in the first quarter, but there are certainly good reasons to be cautious about prospects, not least because underlying domestic demand is likely to remain subdued and export growth has yet to benefit fully from the weaker pound.
Ashley Ingle website – corporate and personal currency broker