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EUR/GBP little changed as UK factory data disappoints

H.S. Borji
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The euro traded steadily against its British counterpart Tuesday, as Germany’s trade surplus blossomed and UK factory output unexpectedly declined.

The EURGBP advanced 0.1 percent to 0.7951 after treading water for much of the European session. The pair traded within a narrow range of 0.7926-0.7959. The EURGBP lost momentum at the end of last week and has declined 0.3 percent since Thursday.

The trend line shows initial support at 0.7923 and resistance at 0.7957.

The EURGBP has declined more than 2.1 percent since June 9, having tumbled to fresh 21-month lows amid diverging monetary policy between the European Central Bank and Bank of England.

The ECB slashed its benchmark lending rate to 0.15 percent at the June policy meetings and introduced a negative deposit rate, effectively charging financial institutions for money they deposit with the ECB overnight. The efforts were put in motion after Eurozone inflation continued to trend in what ECB President Mario Draghi described as the “danger zone” for eight months.

In the UK, meanwhile, a strong domestic-led recovery continues to offer support the Bank of England could raise interest rates sooner than initially forecast. However, the BOE has expressed concerns about subdued wage growth, which in recent weeks has deflated expectations for a 2014 rate hike.

The Bank of England will deliver its next rate decision Thursday. No change to the Bank rate is expected at this time.

In economic data, Germany’s trade balance improved in May, although both exports and imports declined. Germany’s trade surplus increased from €17.2 billion to €18.8 billion in May, the Federal Statistical Office reported today.

Exports declined 1.1 percent in May, while imports fell 3.4 percent.

German economic data, including employment, retail sales and industrial production, softened in May, raising concerns the Eurozone growth engine was beginning to sputter.

The German economy accelerated 0.8 percent in the first quarter, double the rate of the previous quarter. Growth in the broader euro area was much more subdued, as the 18-nation currency bloc posted a quarterly gain of only 0.2 percent.

In UK data, both manufacturing and industrial production unexpectedly declined in May, the Office for National Statistics reported today.

Manufacturing output fell 1.3 percent in May, the biggest monthly decline since January 2013. Compared to May 2013, manufacturing production was up 3.7 percent.

Industrial production – a broader measure of factory output – declined 0.7 percent. Compared to May 2013, industrial production was up 2.3 percent.

Separately, the National Institute of Economic and Social Research said the UK economy expanded 0.9 percent in the second quarter, offering hope for a more balanced recovery in the second half of the year.

Compared to the second quarter of 2013, UK GDP was up 3.2 percent, the NIESR said.

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