Industrial Prod. (MoM) (JUN) (04:30 ET; 08:30 GMT)
Expected: 0.1%
Previous: 0.6%

Industrial Prod. (YoY) (JUN) (04:30 ET; 08:30 GMT)
Expected: 0.8%
Previous: 0.5%

How Will The Markets React?

UK industrial production growth is anticipated to slow in June, however, factory output should still hold at the best levels in almost six years, as higher interest rates have yet to derail the recovery of the manufacturing sector. Furthermore, the rapid appreciation of the British pound against the US dollar has done little to curtail demand for British products, as EUR/GBP has remained relatively stable, limiting the impact of the currency appreciation on the Euro-zone. In fact, strong economic growth in the 13-nation bloc led to a jump in purchases of goods from the UK, helping to drive the trade deficit to narrow to the best levels in nearly a year. Faster growth and demand from the rest of Europe are also helping manufacturers increase prices, which the Bank of England has said is a risk to inflation. As a result, the central bank is widely anticipated to raise rates before year-end, with Wednesday’s Quarterly Inflation Report being the best gauge to determine the BOE’s next move. As a result, market reaction may be limited to a short time frame, as price action will be directed more by risk aversion trends and Wednesday’s BOE report.

Bonds – 10-Year Long Gilt Futures

Gilts have extended their bounce from a short-term supporting trendline, but the upper side of the channel has still capped rallies in the contract, suggesting a degree of reluctance on the part of bulls to carry on the bid tone. Daily studies look somewhat vulnerable given the fading strength for Gilts. The release of UK data on Monday could reaffirm the emerging bearish tone, as the annual rate of industrial production growth is estimated to accelerate. However, the major event risk for Gilts comes on Wednesday, as the Bank of England will issue their Quarterly Inflation Report, so until then, the bonds may continue to simply hold their recent range.

FX – GBP/USD

Monday’s release of UK industrial production is anticipated to show that output growth has slowed from May, but with the annualized rate of growth anticipated to pick up, the data may prove to be bullish for the British pound. However, this week’s Quarterly Inflation Report could be the main determinant of the direction of Cable, as BOE Governor Mervyn King’s delivery of the report will make the bank’s inflation stance far clearer. If King continues to highlight the upside risks to price stability, as European Central Bank President Jean-Claude Trichet did last week, traders will ramp up speculation of a September hike to 6.00 percent. The release of the minutes from the August policy meeting on August 15th will be the other important gauge for the bank’s next move, as just a few votes for a hike will assert that hawks remain on the MPC. On the other hand, a more neutral tone in the Quarterly Inflation Report along with a unanimous vote in the meeting minutes will defer hike expectations until later in the year. In the typical “buy-the-rumor sell-the-news” price action we see so often in forex markets, the most likely scenario for GBP/USD may result in a determined bid tone ahead of Wednesday’s Inflation Report, but end with a subsequent sell-off.

Equities – FTSE 100 Index

The FTSE 100 has gone on to aggressively test support at the 200 SMA and an ascending trendline, as recent bouts of risk aversion have been to the detriment of European and US equity markets. As such, it will be important to watch whether domestic equity markets—an appropriate barometer for global risk appetite—can resume their overall uptrend. If the FTSE 100 makes a decisive break below a nearly year-long trendline around 6,200, trader concerns that many markets have already hit a top will only be exacerbated. However, a strong improvement in Monday’s UK industrial production report will only boost prospects for expansion in the country and could help push the UK index back above the 200 SMA at 6,356.74.

Terri Belkas is a Currency Strategist at FXCM.