UK Output in Focus as Week Draws to a Close

European futures are pointing to a slightly higher open on the final trading day of the week, tracking similar gains made in the US and Asia overnight and ahead of some key data releases from the UK.

Manufacturing production has been on the decline in the UK in recent months and we expect that trend to have continued in February. A big challenge facing the industry this year is going to be the strong pound and what impact it will have on exports, particularly to its largest trading partner, the eurozone.

Not only do they have to contend with a strong pound, the euro is also significantly weaker making UK manufactured products much pricier for euro area consumers. This is not going to help with the low inflation scenario that the UK finds itself embroiled in as in order to compete, they may be forced to lower prices.

The recent decline in manufacturing output could well weigh on growth in the first quarter, although industrial output as a whole only contributes around 15% to GDP. As long as the services sector continues to perform well, it may be enough to paper over the cracks for a while.

NIESR will release its GDP estimate for the three months to March later on this afternoon and that should give us some indication of how well the economic recovery has continued into this year ahead of the first official release in a few weeks.

We have been seeing a small slowdown in growth over the last couple of quarters although not enough to be particularly concerned about. We’re still experiencing the kind of growth that many other countries can only dream about.

The only question is, will the numbers seen in the first quarter have any impact on the upcoming election given that the Conservatives have placed so much emphasis on the economic recovery. A poor showing in the first quarter would be very unwelcome in the weeks leading up to the closest fought election in years.

Overnight we got the latest inflation data from China and things are not looking good despite the slightly better than expected numbers. The biggest concern remains the large declines seen in wholesale prices which should act as a drag on prices paid by the consumer further down the road.

The People’s Bank of China has repeatedly announced cuts to interest rates and the reserve requirement ratio recently in an attempt to stave off deflation but so far this either hasn’t had a chance to support prices or it has failed. I think more rate cuts are inevitable from the PBOC given how far below target inflation is, the only question is how long they’ll wait.

The FTSE is expected to open 22 points higher, the CAC 25 points higher and the DAX 55 points higher.

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.