Ahead of BoE – Pound Wobbles

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Market Drivers May 11, 2017
UK Data misses GBP drifts ot 1.2900
RBNZ surprisingly dovish send kiwi to near .6800
Nikkei 0.31% Dax 0.02%
Oil $48/bbl
Gold $1221/oz.

Europe and Asia:
NZD RBNZ 1.75% remains dovish
GBP UK Trade -13B vs. -11B
GBP UK IP 1.4% vs. 2.1%
GBP IK MP 2.3% vs. 3.0%

North America:
GBP UK BoE 7:00
USD PPI 8:30
USD Weekly Jobless Claims 8:30

The latest batch of economic data from UK missed estimates sending cable lower in early morning London dealing as traders awaited the BoE rate announcement and presser due at 11:00 GMT.

UK Industrial Production, Manufacturing Production and Trade Balance all missed their mark with IP and MP coming at 1.4% vs. 2.1% and 2.3% vs. 3% respectively while the Trade Balance deficit ballooned to -13B GBP vs. -11B GBP eyed. The decline in manufacturing activity may have been weather driven as most of the contraction took place in the energy sector. April’s PMI reports pointed to a more upbeat picture in the sector, but if the numbers miss again next month then it could be a sign that Brexit woes are beginning to hurt UK economy as trade with EU becomes more strained.

Cable drifted lower towards the 1.2900 mark but didn’t quite make it as FX traders awaited the BoE rate decision and presser. The markets expect no change, but the focus will be on Mr. Carney’s attitude towards inflation which continued to escalate well above the banks 2% goal due to the weaker currency. The Governor will most likely argue that effects are transitory as the central bank is loathe to tighten monetary policy amidst stagnant wage growth. Real wages have already fallen in UK due to higher inflation and as result have hurt Retail Sales, so any tightening could only accelerate that trend.

However, if Mr. Carney surprises the market and expresses genuine concern about inflation FX traders will quickly hoover up bids in cable and send the pair through the key 1.3000 resistance mark which it has been eyeing all week long. Generally though, Mr. Carney has been cautious in his outlook and remained stalwartly accommodative so there is little reason to think that he will assume a more hawkish posture today.

Meanwhile in New Zealand, the RBNZ surprised the market by remaining resolutely dovish despite better recent economic data. The central bank reaffirmed its neutral stance and noted that it saw no signs of any inflationary pressures in the system. The kiwi promptly dropped on the news hitting a low of .6820 before finally finding some support and rebounding to .6850 by London morning trade. Still, RBNZ’s assessment will likely weigh on the pair, as the central bank appears to be in no hurry to tighten monetary conditions and the pair could test the key .6800 figure in the near future.

In North America today the focus will be on PPI data due at 12:30 GMT. Last month’s negative reading was a surprise to the market and if today’s release once again shows a contraction in price levels, it would challenge the bullish thesis of 3 more rate hikes from the Fed this year. If inflation readings do remain muted, it will be hard to see how the Fed would justify such aggressive tightening. USDJPY has so far shrugged off any bad news to the pair, but if today’s PPI numbers miss, traders could begin to take profits in earnest, especially since the pair now sits at the long term resistance corridor of 114.00-115.00. And pullback could quickly accelerate and bring 113.50 into view.

Boris Schlossberg
Managing Director

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