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UK manufacturing in focus, as equity market rally falters

Yesterday’s slide in equity markets merely serves to highlight how precarious investor sentiment can be. Having been one of the catalysts for the recent rebound in equity markets in the past few weeks the mining sector had an absolutely awful day, as concerns about China’s economy returned to the forefront on investor’s minds.

Having seen a nice rally on Monday on expectations of further stimulus after Chinese officials projected a 6.5% to 7% GDP target for this year, yesterday’s trade numbers only serve to highlight the mountain Chinese officials have to climb to in order to try and hit them. The weakness of yesterday’s data merely serves to reinforce the importance of this weekend’s retail sales and industrial production data. A similarly abysmal showing here will inevitably raise expectations of further easing measures from Chinese authorities. This will become more inevitable if the ECB eases policy further tomorrow, which seems likely.

These concerns came combined with a warning from the IMF that the global economy is at a very delicate juncture, and that current growth projections could be at risk unless further co-ordinated action is taken to address the weaknesses across the globe, from Asia, to Europe and the US. With the OECD also pointing out that economic activity was showing signs of slowing, it has raised concerns that the current rebound in commodity prices is merely temporary.

The current reporting season has also shown that more European companies fell short of their profit forecasts than met them in the last year, while a warning from the European Commission that France and Italy’s economic weakness could pose a systemic risk to the stability of the whole of Europe due to high levels of public and private debt, has only served to reinforce concerns about the prospects for growth in Europe.

All of these factors are likely to increase the pressure on the ECB at tomorrow’s policy meeting as politicians once again fail to fulfil their side of the bargain on the reforms front.

The manufacturing sector has borne the brunt of the global economic slowdown over the past few months and once again the UK economy is in the cross hairs today with the latest ONS manufacturing and industrial production data for January.

December was an extremely disappointing month with sharp declines in both as 2015 came to a disappointing end. The expectation is for a rebound in January with a 0.4% rise in industrial production, and a 0.2% rise in manufacturing production. This would be in line with a similar improvement seen in the January PMI numbers, but could well prove only temporary given the sharp drop seen in the February PMI data.

The pound slipped back a little in the aftermath of Bank of England governor Mark Carney’s rather feisty exchanges with MP’s yesterday as he warned of the financial stability risks of this summer’s referendum “Brexit” vote, and a vote to leave.  Sterling looks set to continue to remain choppy despite its recent rebound and could be vulnerable to another leg lower if today’s data disappoints.

EURUSD – the 200 day MA at 1.1050 remains a key resistance, with a break targeting the 1.1200 area. Support remains at last week’s low at 1.0800, with a break targeting 1.0600.

GBPUSD – continues to look well supported on dips with the potential for further gains towards 1.4400. To maintain the current momentum we need to hold above 1.4120 trend line support from the recent lows to keep the bullish momentum intact. A fall below 1.4080 retargets the lows at 1.3835.

EURGBP – the potential for further losses towards 0.7520 remains intact while below the 0.7830 level. We need to get below support at 0.7690 for this to unfold, to keep bearish scenario intact.

USDJPY – currently range bound between support at 111.00 and resistance at 114.90 we need to see a break one way or the other for clues as to the next move. The bias remains towards the downside towards 106.00 while resistance at 114.80 remains intact. Above 115.00 argues a short term base is in place.

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