Trading the UK Manufacturing Production Report

GBP/USD is still carrying on with its current uptrend, although the rallies have been subdued lately. A look at the daily time frame shows that while the pair is still safely above the rising trend line connecting the lows, the latest rally has been unable to go past the previous highs near the 1.6800 major psychological level. Some analysts claim that this is already a complex head and shoulders pattern forming, indicative of a reversal.

This weakness in the pound has been mostly due to weaker than expected PMI (purchasing managers index) from the manufacturing, construction, and services sectors. These industries have shown expansionary readings but reflected slower growth for the past month. This suggests that overall economic growth reflected by the GDP might be lower than expected for the first quarter of 2014.

However, the upcoming manufacturing production release could have a potential to spark pound rallies if it comes in stronger than expected. Analysts predict a reading of 0.3% to follow the previous month’s 0.4% increase in production. A negative reading might eventually trigger a GBP/USD break below the trend line while a very positive figure could push for a bounce.

Bear in mind that the pound is also drawing a lot of support from BOE (Bank of England) Governor Carney’s remarks on a possible rate hike. In his speech last week, he mentioned that the UK central bank might be able to hike benchmark rates before the UK general elections occur. This sparked a strong pound rally but that was short-lived because of the bleak services PMI release.

As for the US, the economy showed a lower than expected increase in hiring with the latest NFP report. The jobs data showed a 192K increase in non-farm payrolls instead of the estimated 200K rise, not enough to bring the jobless rate down from 6.7% to 6.6%. The good news though is that the US economy is back to pre-recession levels of 116 million people in full-time employment, which led many to believe that the Fed will carry on with its taper plans.

Of course one also has to heed Fed Chairperson Yellen’s cautionary remarks on how the labor market progress is still slow and that it could continue to rely on monetary stimulus. Evidence of more weakness in the US could cast doubts on the Fed’s taper and potential rate hike in the coming years.

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