Is Pound Headed for Post Brexit Lows?

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Market Drivers August 9, 2016

UK Data misses especially on trade
CNY inflation bit hotter
Nikkei 0.69% Dax 0.45%
Oil $43/bbl
Gold $1340/oz.

Europe and Asia:
CNY CPI -1.7% vs. -2.1%
GBP UK IP 1.6% vs. 1.3%
GBP UK MP 0.9% vs. 1.4%
GBP UK Trade Data -12.5B vs. 9.2B

North America:
CAD Housing Starts 08:15
USD Unit Labor Costs 8:30

Sterling came under heavy selling pressure in Asian session trade today, falling below the key 1.3000 support level for the first time in more than a month after dovish comments from MPC member Ian Mccafferty who published an op-ed piece in the London Times.

Writing in the Times Mr. Mccafferty noted that if UK economic data turns down the central bank could slash rates further taking them towards the zero level while increasing QE at the same time. Mr. Mccafferty is considered to be one of the more hawkish members of the committee and was one the four votes against raising the target of QE at the last BoE meeting, Therefore his comments carried more weight with the market and took cable below the key 1.3000 level before London was even ready to deal.

The pair stabilized underneath that level and spend much of the early London trade consolidating around that figure despite lackluster data on the economic front. UK Manufacturing results came in mixed with Industrial Production bit better at 1.6% vs. 1.3% eyed while Manufacturing Production declined to 0.9% from 1.4% forecast. Both reports were taken just after the Brexit vote so the full impact of the event has not yet been reflected in the figures. Meanwhile the Visible Trade Balance expanded ominously to more than -12B from -10B eyed as imports shot up and given the heavy deterioration on the pound the data is likely to remain negative for the foreseeable future.

Cable continued to hover near the 1.3000 level, but the future of the pair will now be very highly data dependent. Every PMI report will be amplified in its importance as traders will essentially view it as proxy for BOE policy moves. If the PMI reports show further deterioration in a post Brexit environment then Mr. Mccafferty’s warnings will be taken at face value and currency markets will sell cable towards its post Brexit lows of 1.2750 as the month proceeds.

Boris Schlossberg
Managing Director

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