Outlook for GBP Dominated by BoE Event-Risk

The British Pound Sterling (Currency:GBP) has enjoyed a good couple of days of trading on the global currency markets and momentum in morning trade in London favoured sterling after the release of conensus-busting Manufacturing and Industrial Production data. The afternoon session has seen traders sell GBP as they turn cautious ahead of tomorrow's all-important Bank of England Inflation Report.

Highlights:

@8:10: BRC Retail Figures Improve.
@9:30: Sterling Shoots Higher as Industrial and Manufacturing Production Data Deliver.
@14:26: Traders sell sterling as the position for tomorrow's big Bank of England event.

16:30: Sterling holds ground, tomorrow is the big day

Tomorrow at 10:30 we hear from the Bank of England who deliver their quarterly Inflation Report. It will detail the Bank's future approach under new Governor Carney, to inflation, interest rates, the economy, and the pound.

Exchange rates have settled around the following levels:

• The Pound Euro exchange rate is 0.26 pct lower on a day-to-day basis at 1.1562.
• The Pound US dollar exchange rate is 0.06 pct higher at 1.5365.
• The Pound Australian dollar exchange rate is 0.4 pct lower at 1.7134.
• The Pound New Zealand dollar exchange rate is 0.66 pct lower at 1.9503.
• The Pound Singapore Dollar is flat at 1.9496.

Be Aware: The above quotes are taken from the wholesale currency markets. Your bank will charge a spread at their discretion thus compromising the actual rate you are offered. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering you more currency. Please learn more here.

15:50: GBP rally versus Canadian Dollar stalls… for now

Insights into the GBP-CAD from Shaun Osborne at TD Securities:

"GBP/CAD’s reversal from the 1.56 area has slowed over the past two days and might well have stopped altogether. A large “shooting star” signal on the daily chart yesterday suggests the rally has run its course for now but a “confirming” signal is, so far, absent.

"We think the cross will remain choppy in the near-term (the risk of a drop back from the mid 1.59 area may increase through the week). We are still struggling to get a stronger sense of direction for this particular market which remains broadly range-bound between 1.52/1.53-1.62/1.63."
(Click to enlarge)

14:40: Prepare for GBP/USD shock rally

Stephen Gallo at BMO Capital Markets on the likely impact on sterling of tomorrow's Inflation Report:

"The current net short positioning in the GBP based on CFTC data alone appears to be a remnant of two things, primarily: the early 2013 GBP sell-off and the embedded sterling weakness inspired by the July BoE statement alongside the concurrent slump in UK rates.  With this in mind,

"The most likely avenue for “shock” in FX over tomorrow’s BoE event risk would appear to the upside in GBP/USD.

"Should the BoE formally adopt Fed/ECB-style forward guidance on rates and leave market participants on a purely data-dependent path, we think its unlikely that the GBP will remain below $1.5450, given the extent of upside surprises in the recent dataflow.

"Absent other factors left in place by the BoE and designed to offset the likely follow-through from the latest macro economic data, either curve flattening via the front-end or curve steepening via the long-end (or some combination of the two) would tend to boost the GBP tomorrow morning.  

"However, we think the BoE will resist anything more than a very modest degree of upside in rates [and therefore the GBP]."

14:26: Sterling loses ground, FX markets getting ready for BoE Inflation Report

This afternoon we see some clear signs of positioning ahead of tomorrow's headline event - the quarterly Bank of England Inflation Report.

• GBP/EUR has slumped 0.33 pct to reach 1.1545.
• GBP/USD is 0.07 pct lower at 1.5345.
• GBP/AUD is 0.42 pct lower at 1.7129.

12:13: "I remain very bullish on Cable"

Sean Lee at FXWW says he continues to favour the upside in the British pound / US dollar exchange rate (Cable) saying:

"The GBP is looking stronger on the crosses after yesterday’s strong (and leaked) PMI data. EUR/GBP is edging back towards it’s important pivot at .8600 and GBP/AUD made fresh highs above 1.7250.

"It’s by no means a completely bullish picture on the crosses, with GBP/JPY still being capped below 151.50 (which is where macro funds were noted sellers last week).

"Nevertheless I remain very bullish on cable and have taken a very small long position at 1.5350. My last attempt at building a long position ended in tears, lets hope for better luck this time."

10:36: Calling the outlook for GBP-USD remains a challenge

Fundamental data aside, the technical picture behind GBP/USD remains challenging.

RoboForex have just issued the following Wave analysis on the Pound versus US dollar:

"GBP/USD: We may assume that the price is still forming a descending zigzag Y of (D). In this case, a correction [b] of Y of (D) may take the form of horizontal triangle, which may be followed by a descending movement inside the second part of this zigzag, wave [c] of Y of (D)."

9:30: It's another powerful beat by the UK economy, GBP pushes higher

Sterling is powering ahead on some really good economic statistics. As we said @8:36 the ONS data would have to be well ahead of consensus to propel GBP. And it is:

• Manufacturing Production m/m, United Kingdom, Jun Figure released at 1.9, Forecast: 0.9, Prev: -0.8
• Manufacturing Production y/y, United Kingdom, Jun Figure released at 2, Forecast: 0.9, Prev: -2.9,
• Industrial Output y/y, United Kingdom, Jun Figure released at 1.2, Forecast: 0.7, Prev: -2.3
• Industrial Output m/m, United Kingdom, Jun Figure released at 1.1, Forecast: 0.6, Prev: 0

"GBPUSD reacting to signs the manufacturing sector is doing well at the same time as the service sector. Critical resistance at 1.5380," say Forex.com

8:36: Ahead, Industrial Production + Manufacturing Production data

The next hurdle for sterling comes within the hour. At 9:30 look out for Industrial Production for June, (analysts are forecasting +0.6 pct YoY) and Manufacturing Production (+0.9 pct expected for the YoY figures).

Any disappointments could curtail the sterling rally. We imagine a big beat would be required to deliver any upside impetus at this stage.

8:35: GBP in the red on Tuesday morning

The British Pound Sterling (Currency:GBP) is in the red against most major currencies today. We would expect this correction when considering recent GBP strength.

The Pound to Euro exchange rate is 0.05 pct in the red at 1.1577.
The Pound to US dollar exchange rate is 0.06 pct lower at 1.5347.
The Pound to Australian dollar exchange rate is 0.6 pct lower at 1.7099.
The Pound to New Zealand dollar rate is 0.6 pct lower at 1.9543.

8:17: The dangers of relying on the weather

A good summer has been credited with driving retail sales higher, but don't mistake this for a sustainable improvement.

Dan Wagner, CEO of Powa Technologies says:

"Relying solely on the weather for an upturn in retail sales is dangerous when we are in search of significant improvements in economic performance. Instead, there should be a greater emphasis on innovation that engages more directly with consumers to deliver more activity at the tills. The lean towards digital shopping channels is needed but this should be done in a meaningful way that offers a personal experience and encourages some aspect of interactivity.”

8:10: UK retail sales in strong boost

A good start to the day on the data front with encouraging news from the British Retail Consortium (BRC) of a 2.2 pct rise in like-for-like sales values against July 2012.

Also reported is a 3.7 pct rise in employment on the high street - but there have still been many casualties on the high street this year.

Nevertheless it was the third consecutive month of improvement after a fall in April when shops were hit by freezing conditions, the BRC said, though deep discounting also helped reel shoppers into stores.

According to the BRC key to the summer boost was good weather.

BRC director general Helen Dickinson said the "very solid" sales performance was also driven by a 'feel-good factor' arising from the arrival of the Royal baby and sporting success.

8:05: Sterling has momentum thanks to PMI data

Yesterday proved to be another good day for GBP thanks to a strong Services PMI release.

Greg Gibbs at RBS says:

"Contrasting the significant decline in emerging market PMIs, the service sector PMI in the UK surged from 56.9 to 60.2, continuing a rapid acceleration since 48.9 in December last year. The July reading was the high since 2006.
"The US PMI also rebounded from 52.8 to 56.0, reversing the slowdown and returning to the previous high in February, and previous peaks since 2011. The Eurozone services PMI was revised up from 49.6 to 49.8 in July, up from 48.3 in June, suggesting the region has almost stabilised, albeit at a low level, remaining below 50 since Sep-2011."