Cable Crushed as UK Economy Slows

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Market Drivers July 7, 2017
Cable crushed by weak data
Market looks ahead to US NFPs
Nikkei -0.33% Dax -0.14%
Oil $47/bbl
Gold $1220/oz.

Europe and Asia:
GBP UK IP -0.1% vs. 0.4%
GBP UK MP -0.2% vs. 0.5%
GBP UK Trade -11.8B vs. 10.8B

North America:
USD NFP 8:30
CAD Employment 8:30

Cable tumbled in morning London dealing today as latest economic data printed a sea of red numbers indicating that UK economic activity is clearly slowing.

UK reports missed on all fronts with Industrial Production, Manufacturing Production and Trade Balance all coming weaker than expected pushing cable towards the 1.2900 figure in reaction to the news. Although the pair has received a lift from hawkish rhetoric of several BoE members including Haldane and McCafferty it’s difficult to imagine how the UK central bank could seriously consider any tightening action as chances of recession start to rise.

The high inflation rate, along with tepid investment flows caused by the uncertainty of Brexit is wreaking havoc with UK growth and the only way that cable could regain its footing is if the government of PM May moves closer to the soft Brexit position, thus mitigating the worst effects of the exit from the union. At present, there is little evidence that Ms. May has the political will to change course and that leaves the currency vulnerable to further selloff especially if the drumbeat of negative economic data gets louder over the next few months.

In North America, the focus will be on jobs as both US and Canada release their data numbers. Our colleague Kathy Lien noted that ahead of the report the data is decidedly mixed. “Service sector activity accelerated in the month of June, but the employment component dropped to 55.8 from 57.8, reflecting slower job growth. ADP also reported its smallest payroll increase since October. 4-week average jobless claims ticked up from last month as continuing claims rose to its highest level since mid-April. Consumer confidence is mixed, leaving Challenger’s 19.3% reduction in layoffs as the only piece of data supporting stronger payroll growth since manufacturing jobs are a separate line item in the non-farm payrolls report.”

We stated yesterday that President Trump tweeted this week that jobs numbers should show further improvement. Given the fact that BLS data is embargoed, his thoughts may have been just wishful thinking, but if he is indeed correct USDJPY which has already been boosted in the overnight trade by widespread buying of JGBs by the BOJ, will quickly pierce the 114.00 figure. However, if the preliminary data is any guide the NFPs could miss their mark and the pair will once again test the 113.00 level as the day proceeds.

Boris Schlossberg
Managing Director

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