Pound loses early steam after dismal UK industrial output data
Wednesday, October 6, 2004 12:38:21 PM
afxpress.com
LONDON (AFX) - The pound has had a see-saw session, losing some of its early gains after dismal data from the UK manufacturing sector called into doubt the prospect of a November Bank of England rate hike. Having started the session weak, the currency rallied when house price data came in unexpectedly strong, only to give back most of those gains when official industrial and manufacturing numbers proved very weak
The office of National Statistics said manufacturing output in August fell 0.8 pct from the previous month, against expectations of a modest 0.3 pct increase. That was the biggest monthly decline since October 2002, when output slid by 1.3 pct
Meanwhile, the wider measure of industrial production, which also includes utilities output, also declined by 0.8 pct in August from July, in sharp contrast to the 0.3 pct improvement predicted by analysts. That was the biggest monthly decline since August 2003, when production fell by 0.9 pct
The industrial production data clearly damaged the case for further monetary policy tightening in the UK, said Daniel Katzive at UBS
The data is likely to cement expectations that the Bank of England's Monetary Policy Committee will keep its key repo rate unchanged at 4.75 pct at its rate-setting meeting which begins today and concludes tomorrow. The question now is whether the MPC will raise rates again in November, which until recently had largely been expected by the analyst community
Ray Attrill, research director at 4CAST, said the data corroborates evidence elsewhere that there is a "definite" slowing in overall economic growth in the UK
As a result, he said GDP growth in the third quarter is likely to be around trend of 0.6 pct "at best." "This is adding to the case for a lengthier rates pause," said Attrill, who last week abandoned his belief that the MPC will raise interest rates again in November in light of the subdued data
Earlier, the pound found a boost from stronger-than-expected UK house price data. The pound had been sold down by a large bank ahead of the house price data, spooking the market into speculating that the numbers would come in very weak. In the event, the data allayed fears of a crash in UK house prices, helping the pound recoup losses
The monthly house price index from HBOS unit Halifax found that house prices rose by 1.4 pct in September from the previous month for an annual rise of 20.5 pct, taking the average house price to 162,911 stg
In August, prices fell 0.6 pct from July but rose 21.3 pct from the year before. While the quarterly data from Halifax shows clearly that property prices are very much in a cooling trend, the market chose to focus on the headline numbers. "The headline figure eased some of the market's worst fears of a housing market crash," Attrill said
According to Halifax, in the three months to September prices rose by 2.7 pct compared with the 6.1 pct increase recorded in the second quarter of the year. The third-quarter reading is the smallest since the first three months of 2001
Elsewhere, the dollar stayed firm ahead of the crucial September job market report on Friday. The data will go a long way to help US rate hike expectations
The markets are pricing in just one more quarter-point rate hike in the US this year, although the rate setting Federal Open Market Committee has two more meetings left this year. Evidence of strong job creation in September will help solidify US rate hike expectations, boosting the dollar. "The dollar appears likely to hold within its recent range, equivalent to 1.2250 usd to 1.2450 usd against euro the in the run-up to the employment report on Friday," UBS' Katziev said
A disappointing result could be the long-awaited catalyst needed to generate a break of the broader range, he added. Separately, markets also continued to watch oil prices after benchmark crude in New York scaled new heights above 51 usd/barrel overnight
Concerns over the debilitating effects of higher oil prices on economic growth have the potential to put a drag on the major currencies such as the dollar, yen, euro and pound. But notably the spike in oil prices could not prevent share prices in Tokyo from rising, in turn helping to prop up the yen. In Japan, the Nikkei 225 index gained a further 0.9 pct to hit a two-month high |
