Market Drivers October 22, 2015

UK Retail Sales beat – cable takes 5500
AUD CBA hikes rates 15bp and drives AU below 7200
Nikkei -0.64% Europe .0.09%
Oil $45/bbl
Gold $1167/oz

Europe and Asia:
AUD CBA hikes 15bp
GBP UK Retail Sales 1.9% vs. 0.3%

North America:
EUR ECB rate decision 07:45

USD Weekly Jobless 08:30

USD Existing Home Sales

UK Retail Sales handily beat estimates sending cable through the 1.5500 level in morning London dealing but the pair quickly lost gains as traders absorbed FM Osborne’s tough comments on UK membership in the EU.

UK Retail Sales printed at 1.9% versus 0.3% eyed but some of the prior numbers were revised downward and much of the gain according to the ONS was led by large volume of beer sales for the Rugby championships. Still the number was considerably better than forecasts and ONS now estimates that it will add 0.1% to Q3 GDP.

The UK continues to demonstrate that it is one of the better performing economies in the G-7 universe and the only one that appears to have decent wage growth that could support the possible suspension of QE. However, in addition to the tepid inflation numbers the BoE must also be concerned about the spectre of Brexit as UK politicians continue distance themselves from further integration into EU.

Today finance minister George Osborne noted that UK does not want to be part of an ever closer EU. Such statements are sure to rattle the markets and indeed cable quickly backed off its highs as any hint of a possible Brexit puts cable under threat. Yesterday Governor Carney, while trying to shy away from the politics of the issue, emphasized the positive economic impacts of further integration with EU including the more efficient and liquid capital markets so critical to UK economic well being.

If the negotiations with EU turn sour that factor may completely overshadow the improving UK economic performance and force BoE to remain stationary far longer than anticipated as MPC members hold monetary policy stable in light of any political shocks from the threat of Brexit. For now the pound remains relatively well bid as the economic performance continues to signal improvement and eventual monetary tightening, but the battle with EU this fall could scuttle all those plans and introduce and unexpected element of risk into the pound trade.

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