Cable Clipped on GDP But Continues to Fly

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Market Drivers April 28, 2015

UK GDP only 0.3% vs. 0.5% eyed
AU bid on anticipation of no rate cut in May
Nikkei .38% Europe -0.57%
Oil $57/bbl
Gold $1200/oz.

Europe and Asia:
AUD CB Leading Index 0.5% vs. 0.3%
EUR UK Prelim GDP 0.3% vs. 0.5%

North America:
USD Consumer Confidence 10:00

UK GDP data disappointed the market coming in at just 0.3% growth versus 0.5% eyed and pushed the pair below the 1.5200 level in morning London dealing before it stabilized and rebounded somewhat.

The preliminary GDP reading was disappointing on almost all levels with services output expanding only 0.5% vs. 0.9% eyed and Industrial production contracting by -0.1% vs. 0.2% forecast. This was the weakest reading since Q4 of 2012 and likely reflects the general global slowdown in economic activity that was seen across the G-11 universe.

In either case the news could not have come at the least opportune time for the government of David Cameron as the Torries are in the midst of a statistically even tie with Labor ahead of the UK election less that 2 weeks away. Yesterday, news of a poll that showed Torries pulling away helped boost the pound and propel it through the 1.5200 level, but today’s disappointing news may give traders pause as the wait and see if the slowdown in GDP has any impact on voter sentiment.

Irrespective of the polls, the UK election is unlikely to produce a workable majority for either party unless we see a massive change in voter preferences at the very last moment. A minority government is a recipe for instability and such an outcome could weigh on cable as we get close to the election. For now however, the markets remained relatively sanguine and cable quickly recovered to trade above 1.5200 by mid morning London trade. Part of the reason is the general dollar weakness as markets feel increasingly frustrated with the slow pace of US growth and the lack of any urgency on the part of the Fed to normalize rates. Still cable remains vulnerable to political risk and the pair may find resistance at these levels until the election picture begins to clear up.

Elsewhere in Australia Governor Stevens refused to discuss monetary policy citing the quiet period ahead of the RBA meeting next week, but markets nevertheless took that as a bullish sign that the Aussie central bank will stay pat for another month and carry trade flows poured into the pair taking AUD/USD through the .7900 figure – a level it hasn’t seen in more than a month.

Even if the RBA remains stationary, the policymakers are sure to notice the recent strength in the pair and will likely add some forceful language to their communique. Furthermore if it becomes increasingly clear that the Fed will not move on rates anytime soon, the RBA may be forced to ease once again in order to keep the pair from rising through the key .8000 level.

In North America today the calendar is light with only US Consumer Sentiment data on the docket. The market is looking for a rise to 102.6 versus 101.3 and any bump in consumer attitudes would be a welcome sign for dollar bulls. The recent data has shown a big dichotomy in the US economy as business spending slows but consumer demand has picked up. The later is generally more important. If positive consumer sentiment can be sustained it will likely revive business spending once again and provide Fed with much greater level of comfort to begin to normalize rates.

Boris Schlossberg
Managing Director

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