The British Pound has rallied very strong so far this year. The rally has been a continuation of strong bullish trends which emerged in the second-half of 2013. The rally has been largely fueled as forex traders anticipate the Bank of England will move to increase interest rates this year and each pullback was met by strong buying demand.
Hope for an increase in interest rates were largely ignited as the British economy is performing reasonably strong, but the most recent economic reports released this week have raised some early red flag as to the underlying strength of the UK economy. In addition communication out of the Bank of England has send mixed signals to the markets as Governor Carney has changed his wording as regards to when interest rates will begin to rise.
Industrial production as well as manufacturing production delivered a big blow to forex traders counting on an increase in interest rates as both contracted unexpectedly in May for the worst reading in 16 months. Industrial production contracted by 0.7% while manufacturing production contracted by 1.3%. Annualized industrial production fell to 2.3% while annualized manufacturing production dropped to 3.7%.
Additional economic reports this week showed a decrease in the NFIB Small Business Optimism Index to 95.0 in June, down 1.6 points while the UK Halifax House Price Index showed a contraction of 0.6%. The UK Trade Deficit surged to £9.200 billion or sevenfold expectations. UK construction output also contracted by 1.1% in May while annualized construction output decreased to 3.5%.
Forex traders are advised to be careful with the British Pound as the most recent economic data disappointments may result in a correction in the British Pound. Depending on further economic reports released over the next few trading weeks the correction could either be magnified to the downside or kept at bay. It is important to monitor economic developments out of the UK as well as caution when the Bank of England makes an announcement.