Market Drivers November 20, 2014

EZ PMI miss sending euro to a test of 1.2500

UK Retail Sales better at 0.8% vs. 0.3%

Nikkei .07% Europe -.73%

Oil $74/bbl

Gold $1188/oz.

Europe and Asia:
CNY HSBC PMI 50.0 vs. 50.2
EUR PMI Man 50.4 vs. 50.9
EUR PMI Svc. 51.3 vs. 52.3
GBP Retail Sales 0.8% vs. 0.3% views

North America:
USD CPI 08:30
USD Philly Fed 14:00

Its been a mixed picture in Asian and early European trade today providing lots of two way action in the major pairs with euro taking the brunt of the selling while cable recovered most of its losses on the back of better UK Retail Sales.

In Europe the flash PMI data from the region showed further weakness with PMI Manufacturing printing at 50.4 versus 50.9 forecast while PMI Services declined to 51.3 from 52.3 projected. This was the lowest reading in 16 months indicating that the slowdown in the region continues and has yet to find a bottom. Most troubling of all was the fact that German PMI Manufacturing slipped to 50.0 – just on the cusp of the boom/bust line.

The news out of the EZ has to be of concern to ECB policymakers who have struggled with ways to stimulate demand in the region. With growth flagging the chances of some sort of QE program out of ECB has increased and although the Germans may continue to oppose further accommodative measures, the decline in German production and the prospect of recession in Europe’s largest economy may make the Germans more amenable to further accommodative action. The EUR/USD dropped to a low of 1.2503 but stabilized ahead of the key figure level for now. The selling pressure on the unit however is likely to continue and it may test those levels later in the global day.

In UK the Retail Sales numbers printed at 0.8% versus 0.3% – a strong jump in demand led by furniture, food and non-food items. But the news was cold comfort for cable bulls as the headline was dampened by the fact that Retail Sales price deflator declined by -1.5% on the back of lower petrol costs. The tepid rate of inflation is likely to frustrate any attempts by the MPC hawks to expedite the rate hike cycle and ultimately gave up most of the post news gains on that assumption.

Another factor that is starting to weigh on cable is the brewing political battle over UK’s membership in the EU. The UK exit from EU which is a hot topic in the conservative circles may become a serious problem for PM Cameron if the isolationist UKIP party begins to gain traction amongst the UK electorate. A local election today in Rochester and Strood may offer clues as to the mindset of the electorate especially in more rural areas.

Any real concern that UK may withdraw or try to renegotiate its membership in the EU could lead to massive capital outflow out of UK and weigh heavily on cable. Some analysts have already made the case that some of the pairs recent weakness was due not only to the hesitancy of the BoE to hike rates but to investor worries over the frayed economic links with the continent.

In North America today the focus lies on the CPI and Philly Fed data which could help the buck push higher if it surprises to the upside. The market is looking for a slight bump in core to 0.2% from 0.1% the period prior and a slight decline in Philly Fed numbers to 18 from 20. USD/JPY has pushed higher in Asian trade rising to 118.98 but dropped later on some profit taking. The pair has become such a consensus trade that it has taken on a momentum of its own. However having risen so far so fast its is vulnerable to a pullback and if US releases disappoint it may test 118.00 support as the day goes by.

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