Tomorrow is projected to be a very busy day for the pound sterling. We have the release of several important data points that routinely move the market.
That’s aside from the continuing saga of Brexit, and increasing fears that the UK has slipped into a technical recession!
We could be getting some confirmation of the third release of monthly GDP figures for the quarter.
At the same time, we also get manufacturing figures and trade balance. These are both key for the future evolution of the currency.
September’s data is the last full month ahead of the Brexit deadline. Like last time, it might be a bit distorted because of the uncertainty, and businesses are getting ready for a potential hard Brexit.
Later, we have a speech by BOE’s Carney.
What We Are Expecting
The figure likely to get the lion’s share of market attention is the GDP figure.
Expectations are for the September preliminary GDP to remain flat. This is compared to +0.3% in the prior month. A result like this would imply that the economy managed to grow slightly during the third quarter.
However, a result below -0.3% would be an indicator that the UK had slipped into a technical recession. It would likely send the pound lower, but we won’t get the official version until November.
As for manufacturing production, expectations are for it to return negative at -0.6%, compared to +0.3% in August.
However, the last time a Brexit deadline was approaching, we saw an increase in productivity as businesses got ready for potential fallout. This time, they don’t have as much flexibility, so the pre-Brexit effect is likely to be smaller.
Projections indicate that the trade balance will improve a bit to -£12.1B from -£12.5B in the prior month.
Excluding EU trade, we can expect the balance to largely the same at -£3.98 compared to -£3.97. The trade deficit has been shrinking markedly over the last few months, driven primarily by a growth in exports to non-EU customers.
Additionally, imports have slacked off, which is being attributed to a weaker pound making purchases overseas more expensive.
The Market Reaction
We could expect some ups and downs around the release of the figures, especially if one comes in positive for the pound while the other negative. There is a chance that a surprise on the upside will have a stronger reaction in the market than a surprise on the downside.
Just yesterday we had a report showing that the services sector was under pressure.
If manufacturing were to surprise on the upside, it could offset some of the concerns that contributed to a lower pound so far this week. In general, traders seem a lot more willing to price in negativity ahead of data releases.
It’s All Relative
When considering price fluctuations in currency pairs, we always have to account for the other side of the equation.
While poor data, for example, would lead to a weaker pound, the situation for other countries is not as auspicious either. Even with poor data, we could get relative strength in sterling, simply because it’s not as bad as its counterparts.
This scenario is especially relevant to the GBPEUR cross, where data out of Germany, in particular, has been underperforming. Recent data from the US hasn’t been as auspicious, either, with the ISM survey coming in the worst since 2009. That being said, American manufacturing still seems in a better condition than the UK’s, the UAW strike notwithstanding.
UK companies are keeping their capital expenditure on hold pending the resolution of Brexit. Without a substantial organic increase in liquidity, the next round of data might significantly increase the chances that the BOE will finally look into taking action.
Therein lies the potential for downside risk in sterling!