Daily Market Brief 11 August 2017

U.K. Data brings a Little Relief

August 11th: Highlights

  • Industrial and Manufacturing output beat expectations
  • U.S. Factory gate prices fall unexpectedly
  • North Korean crisis heightens risk aversion

Output data supports Sterling

Manufacturing and Industrial Production data for June brought the pound a little relief yesterday as both beat analysts’ expectations.

Manufacturing production was flat in June after a 0.1% fall in May but was 0.6% higher than a year ago. Industrial production rose by 0.5% comfortably exceeding analysts’ 0.1% prediction. Sterling held on close to the 1.3000 level against the dollar trading in a range between 1.3017 and 1.2951.

Brexit continues to weigh heavily on Sterling with speculation over the final bill and access to the single market the most important current issues. In the absence of any official information, traders are content to make their own minds up. Considering the headwinds facing the currency it has held up reasonably well. Versus the Euro it is now entrenched below the 0.9000 level but any further headway for the single currency is hampered by continuing commercial buyers of the pound.

Next week’s inflation and employment data will provide a further insight into the short-term direction for the pound. It is likely that inflation will have risen again back towards 3.00% as June’s data is proven to be an anomaly. The gap between wages growth and inflation will widen again bringing pressure to the pound.

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U.S. factory gate prices fall unexpectedly

The cost of raw materials used by U.S. industry and manufacturing fell unexpectedly in July. The 0.1% fall led to a year on year rise of 1.8%, following June’s 1.9% and below the market’s expectation for a break of 2%.

Today sees consumer price data for July being released in the U.S. This will be closely studied by analysts searching for clues about the timing of the next rise in interest rates. It had been widely assumed that rates were on hold following two hikes this year following one last December. However, strong employment reports for both July and June have reawakened the possibility of further tightening.

The dollar reacted has reacted positively. It has arrested its recent slide as the index of its value against its major trading partners currencies has stabilized above 93.00. The Euro remains in a consolidation phase above support at 1.1680 with further gains likely as the summer lull fades. The JPY and CHF are both reacting to the North Korean crisis and have made strong gains. The outlook for the dollar is mixed as the possibility of a rate hike is countered by the President’s continuing difficulty in passing legislation through Congress

Trump issues Stark warning

North Korean Leader Kim Jong-un should be under no illusion, if he ever was, about the outcome should he test fire four missiles in the direction of the U.S. territory of Guam. President Trump warned Kim to be “very very nervous” about doing anything to harm the U.S. or its allies. Defense Secretary James Mattis following up his stark warning the day before by agreeing with his boss and saying that any armed conflict would be “catastrophic” for the North Korean State.

The Jpy and Chf continued to strengthen as the markets “go to” currencies in times of heightened risk aversion.

The next few days should see a conclusion to this crisis, or at least it will come to a head.

Despite his eccentric manner, Kim has tended to follow through on his threats so a further test is possible. Trump will not be able to back down from his threat of reprisals so an escalation is likely. The U.S. will be mindful of acting in accordance with UN resolutions to ensure that China remains “on-side”.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”