GBP/USD - At 5-week highs, Official numbers need to confirm the J-Curve effect

The Asian desks took cues from the action in the North American session and offered US dollar across the board. Thus, GBP/USD jumped to a fresh 5-week high of 1.3139 levels. As discussed yesterday, the rally is backed by the narrowing US-UK 10-year yield differential.

Focus on UK data

At 08:30 GMT, Office for National Statistics will release industrial production, manufacturing production, construction output and trade statistics, while the Bank of England will publish consumer inflation expectations.

Manufacturing production is seen improving 0.3% on the month from 0.0% June. Industrial production and manufacturing both made negative contributions to GDP growth in the second quarter.

The total trade deficit is seen falling slightly to GBP 3.250 billion in July from the previous month’s figure of GBP 4.564 billion.

UK July manufacturing PMI had bettered estimates and had shown a faster rise in the new business orders and export orders. The CBI data for August talked about boost in activity due to weak Pound.

Official figures need to confirm J-Curve effect

J-curve theory says a country's trade deficit will worsen initially after the depreciation of its currency. Eventually, the benefit of a weak currency will kick-in and lead to an expansion of exports and a cut in imports--which, in turn, will improve the balance of payments

The leading indicators say the J-curve effect is finally working in the UK economy. However, the official numbers are yet to confirm the same. A narrower trade deficit and a bigger-than-expected manufacturing production figure could add credence to the lead indicators and push GBP/USD above 1.3151 [76.4% Fib R of 1.3268-1.2774].

GBP/USD Technical Levels

The spot traded at 1.3130 at press time. A break above 1.3151 [76.4% Fib R of 1.3268-1.2774] would open up upside towards 1.32 [zero figure], above which a major hurdle is seen only at 1.3268 [July high]. On the downside, breach of support at 1.3094 [session low] could yield a pullback to 1.3079 [61.8% Fib R of 1.3268-1.2774], under which the 5-DMA could be put to test. The moving average is currently stationed at 1.3046.