British Pound Pares Overnight Advance as Production Falter, Euro Poised to Test Yearly High

Written by David Song, Currency Analyst

The British pound rose to an intraday high of 1.6050 following the jump in U.K. home prices however, the currency failed to hold ground as industrial outputs unexpectedly fell in August.

Talking Points
•    Japanese Yen: Trends Lower to Trade at 89.00
•    Pound: House Prices Increase, Production Falters
•    Euro: ECB Curbs Speculation for Rate Hike
•    US Dollar: Risk Trends to Dictate Price Action

British Pound Pares Overnight Advance as Production Falter, Euro Poised to Test Yearly High

The British pound rose to an intraday high of 1.6050 following the jump in U.K. home prices however, the currency failed to hold ground as industrial outputs unexpectedly fell in August. The GBP/USD remains little changed from the previous day and continues to hold the narrow range from the previous week, and the pound-dollar may is likely to trend sideways ahead of the Bank of England interest rate decision on Thursday as investors weigh the outlook for future policy.

The Halifax home price index surged 1.6% after rising 0.8% in August to exceeded expectations for a 0.6% rise, while the annualized rate slipped 7.4% during the three-months through September amid forecasts for a 7.8% decline, and housing conditions are likely to improve throughout the second half of the year as the Bank of England takes unprecedented steps to shore up the ailing economy. At the same time, a separate report showed industrial outputs unexpectedly plunged 2.5% in August after rising 0.5% in the previous month, with the annual rate of production tumbling 11.3% from the previous year, while manufacturing slipped 1.9% from July to mark the lowest level of outputs since 1992. As the economic outlook remains uncertain, the slew of mixed data suggests the BoE will maintain a dovish outlook for future policy as policy makers continue to see a risk for a slower recovery, and we may see the British pound continue to search for a bottom as investors scale back expectations for higher interest rates in the following year.

The euro advanced against to greenback for the third day and crossed back above the 20-Day moving average (1.4653) to reach a high of 1.4752, and the EUR/USD looks poised to test the yearly high at 1.4846 as investors speculate the European Central Bank to tighten policy next year. Meanwhile, ECB council member Erkki Liikanen said that central bank will withdraw its emergency programs “when the economic situation allows,” while Miguel Fernandez Ordonez argued pulling the plug on the stimulus too soon could hurt the economic recovery as uncertainties remain high. Moreover, Mr. Ordonez expects a slow recovery and anticipates price pressures to increase by the end of the year, but the council member held a dovish outlook for future price growth as he expects inflation to stay moderate for some time. As board members expect a protracted recovery and expect price pressures to remain subdued throughout the second-half of the year, the central bank is likely to maintain its current policy on Thursday in order to promote a sustainable recovery.

The U.S. dollar weakened across the board after The Independent newspaper said the Persian Gulf states were in talks with Japan and China to move oil pricing to a basket of assets, which would include the euro and the Japanese yen, while the aussie-dollar jumped to a fresh yearly high of 0.8885 as the Reserve Bank of Australia surprised the markets with a 25bp rate hike to 3.25%. At the same time, equity futures are higher on the day and foreshadow a higher open for the U.S. market, and the reserve currency may continue to face increased selling pressures going into the North American trade as investors raise their appetite for higher-yielding assets.

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