While some of the weakness in yesterday’s UK industrial production data for January was due to disruptions to North Sea oil output, manufacturing output also proved to be much weaker than expected. The UK is not alone, as figures for Germany last week and France on Monday showed that manufacturing output also fell in the euro area’s two biggest economies in January. Today’s data for industrial production in the euro area as a whole are also likely to be down. Indeed, given the falls in France and German, there is a risk that output fell by more than our forecast of 0.2%. In contrast, business surveys suggest manufacturing activity is picking up in the US and we expect Friday’s output data will confirm this. The key problem for euro area industrialists is the weakness of demand in Europe, but the rise in the euro will also not have helped competitiveness.
EUR/USD has been confined to a tight 1.2980-1.3100 range. Eurozone industrial production this morning could see some interest; both German and French numbers released earlier this month were on the soft side of market expectations suggesting there are slight downside risks to today’s number. While this will be negative for the euro Lloyds TSB doubt it would be sufficient to trigger a break lower in EUR/USD, which remains well supported below 1.30. US retail sales could also pose a downside risk for EUR/USD, better US data continues to be supportive for USD and better data today could put further pressure on EUR.
Today’s US retail sales data for February should provide another indication of the strength of the US upturn. So far it appears that the January hike in payroll taxes has had only a limited impact on consumer spending. January’s sales held up quite well and initial indications are that February saw another rise. If this is the case, it improves the chances that the economy will continue to grow even as the impact of the “sequester” starts to be felt.
The RBNZ meet late this evening; the RBNZ have kept policy rates unchanged at 2.50% since March 2011 and looks likely to remain unchanged today. However, the central bank has repeatedly shown their concern for the strength of the currency. In February Governor Wheeler said in a speech that the NZD was overvalued and was prepared to intervene if necessary, but can only ‘attempt to smooth out peaks’. In the January RBNZ meeting, the bank highlighted inflation remained subdued reflecting the impact of an overvalued NZD, and the strength of the NZD continues to undermine exports.
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