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Devil is in the detail as Pound slumps again - despite improved wage growth

Today’s macro highlights:

  • EUR - Eurozone CPI (April)
  • USD - Industrial Production (April)
  • USD - Building Permits (April)

Devil is in the detail as Pound slumps again - despite improved wage growth

Sterling faced something of a conundrum yesterday as cable tested fresh lows for the year, despite weekly earnings increasing 2.9% as expected. Although this has the potential to fuel inflationary pressures and in turn force the Bank of England’s hand when it comes to an August rate hike, productivity data for the first quarter showed a surprise slow-down. This is a marked turnaround from what we saw reported for the previous two quarters and to sustain wage packet growth, productivity needs to be rising continuously. We are repeatedly reminded that tightening monetary policy is data dependent - numbers like this are unsurprisingly weighing on the Pound.

That German GDP reading early yesterday morning may have raised a few eyebrows, but the corresponding Eurozone-wide print met with expectations. However, a shortfall in Eurozone Industrial Production, combined with a steady run of positive US data, served to knock the Euro markedly lower. In light of this, the inflation reading which is due from the currency bloc at 10am BST will be under close scrutiny. On the basis the Euro has seen fairly heavy selling of late, anything at or above the expected 1.2% figure could readily see something of a bounce back on EUR/USD.

We have a handful of readings from the US later today including Building Permits at 1.30pm BST, which gives an indication of confidence in the construction sector. A month-on-month fall is expected here, but a clear uptrend remains in play so this is unlikely to prove much of a distraction. Industrial Production is due for release at 2.15pm BST and with expectations being for a slight improvement over the March figure, this could be more telling. A marked shortfall here could be the sort of signal that may push the Federal Reserve to dial down the rhetoric a shade over its policy outlook for the remainder of the year.

Cable briefly touched fresh lows for the year during yesterday’s session and although we saw a 0.5 cent rebound, pressure remains very much on the downside. Yet again we’ve seen the market react to the idea that unless the data improves, then interest rates won’t be going anywhere in August, either.

The pair posted its worst one day fall since late March yesterday in the wake of that tepid string of data releases. The dollar remains very much in favour right now, so if the divergence between the two economies does continue then there’s no reason why we won’t be pushing down to those lows from late last year in the 1.16-1.17 region.

A steady run of gains for the pair during Tuesday’s session, with EUR/GBP moving close to levels last seen ahead of the Bank of England meeting last week. There’s little data due from the UK today so further disappointment from the Eurozone could add fresh upside here, opening the way for another test of the 1.15-1.1525 range which has been providing resistance repeatedly over the last six months.