The pound edged slightly lower against the US dollar on Tuesday, after a report showed UK manufacturing output increased at a faster-than-expected pace in January, but the broader measure of industrial production was hampered by the recent bad weather conditions. Meanwhile, Bank of England Governor Mark Carney said that the main interest rate will gradually increase from the current record low level over the next three years.
GBP/USD touched a session low at 1.6616 at 09:19 GMT, after which consolidation followed at 1.6621, losing 0.13% for the day. Support was likely to be received at February 24th low, 1.6584, while resistance was to be met at March 10th high, 1.6742.
The UK Office for National Statistics (ONS) reported today that the nations manufacturing output rose 0.4% in January, exceeding analysts expectations of a 0.3% increase. Decembers manufacturing production received an upward revision to a 0.4% increase from a previously estimated 0.3% gain. At the same time, industrial production, which also includes utilities and mines, advanced 0.1% in January, trailing analysts estimates of a 0.2% increase. Industrial output in December was upward revised to 0.5% gain, from a previously reported 0.4% increase. The slowdown in industrial production can be attributed to recent bad weather conditions in the UK, which hit oil and gas production.
In annualized terms, manufacturing output increased at a 3.3% rate in January, in line with analysts forecasts and up from a 1.4% rate in the previous month. The report also revealed that industrial production rose 2.9% in January from a year ago, short of analysts estimates of a 3% advance, but higher than the 1.9% increase in the previous month.
According to data by the ONS, nine out of thirteen sectors increased output, with 6.2% gain in production of rubber and plastic products, partly offset by a 13.9% decline in pharmaceuticals production, the largest monthly decline in more than four decades.
Yesterday, the sterling fell by 0.6% against the US dollar, the most since January 13, after Bank of England Deputy Governor Charlie Bean said that further strengthening of the UK currency may be an obstacle to economic recovery.
Mark Carney said today before the UK Treasury Committee that members of the central bank Monetary Policy Committee deviated widely in their opinions as to what is the amount of spare capacity in the UK economy. He also added that market players expectations that the main interest rate may reach 2% or 2.5% over the next three years are plausible.
In its quarterly inflation report last month, Bank of England revised its forward guidance, replacing the 7% unemployment threshold with a range of economic indicators, including spare capacity and said it intended to maintain the stock of purchased assets at least until the first increase in its benchmark rate.
The central bank also raised its forecast for the UK economic growth in 2014 to 3.4% from 2.8% projected in November and predicted the first increase of interest rates will come in April 2015. Bank of England projected inflation of 1.9% in the next three years, below the central bank target of 2%.
BoE said the unemployment rate will probably fall below 7% in the first quarter of this year, but at the same time underscored there was “scope to absorb spare capacity further before raising bank rate” from the current record-low 0.5%. BoE estimated an output gap between 1% and 1.5% of UK gross domestic product.
The sterling has advanced 13% in the past year, being the best performer of 10-developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, while the US dollar slipped 0.5%.
Meanwhile, greenback’s demand was supported after two Fed officials commented yesterday that the hurdle rate to alter the pace of Fed stimulus cuts was too high.
Fed President of Philadelphia Charles Plosser, who is a voting member this year, commented yesterday that the recent batch of strong US economic data wasn’t enough to alter the pace of the central bank asset purchases. His statement was later echoed by Chicago Fed President Charles Evans, who will not vote on policy this year.
“Given the fact that we’ve embarked on measured reductions, it’s important to give some certainty or at least clarity to the markets on what we’re doing,” Plosser said in a Bloomberg interview. “It’s OK to continue at 10 billion. The hurdle rate for change is pretty high in either direction.”
Federal Reserve Chair Janet Yellen said last month that central bank’s officials were “open to reconsidering” the pace of reductions in monthly bond purchase, should the economy falter, in contrast with her comments made earlier in February, that US economy has gained enough strength in order to withstand reduction of monetary stimulus.
At the same time, Fed officials will try to determine whether the weakness economy has recently demonstrated is due to temporary factors, before their next policy meeting scheduled for March 18-19th.
The central bank announced in December that it will pare monthly bond-buying purchases by $10 billion, after which it decided on another reduction of the same size at the meeting on policy in January, underscoring that labor market indicators, which “were mixed but on balance showed further improvement”, while nation’s economic growth has “picked up in recent quarters.”
Federal Reserve will probably continue to pare stimulus by $10 billion at each policy meeting before exiting the program in December, according to a Bloomberg News survey of 41 economists, conducted on January 10th.
Elsewhere, USD/JPY hit a session low at 103.19 at 08:00 GMT, after which the pair erased earlier losses to trade little changed at 103.29 at 09:08 GMT, adding 0.02% for the day. Support was likely to be received at March 10th low, 102.94, while resistance was to be encountered at March 7th high, 103.76, also the pair’s strongest since January 23rd.
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