Cable Goes on a Tear

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Market Drivers May 17, 2016

UK Powers through 1.4500 but loses it on cold CPI data
RBA minutes suggest hold
Nikkei 0.13% Dax 0.12%
Oil $47/bbl
Gold $1271/oz.

Europe and Asia:
AUD RBA Minutes neutral
GBP UK CPI 0.3% vs. 0.5%

North America:
USD Building Permits 8:30
USD CPI 8:30
CAD Manufacturing Sales

It’s been a volatile night of trade for cable which at one point rose more than 125 points off session lows on short covering and optimism about the latest Brexit polling only to give up a large chunk of its gains on colder than expected CPI data.

Cable took off early in Asia rising to 1.4465 during what are generally illiquid conditions on some Brexit polling data that showed the Remain vote pulling ahead. Earlier in the day the pair appeared to have found support at the 1.4400 level and the move in Asia may have been prompted by short covering more than anything else.

The pair continued to power on until it ran into a set of weak CPI numbers which showed that inflation readings came in at 0.3% versus 0.5% eyed. UK inflation reading have been volatile for the past few months as seasonal effects have distorted data. One of the biggest drops in this month’s reading was in airline fares which were up significantly the month prior.

Despite the volatility UK inflation data remains subdued and well below the BOE 2% target suggesting that monetary policy will remain stationary for the foreseeable future even if the EU referendum is rejected. Cable continues to benefit from market’s complacency on the issue with most traders convinced that the referendum will fail, but the two sides remain uncomfortably close even in the latest polling data which indicates that a risk of Brexit surprise is very much a real possibility.

Meanwhile elsewhere Aussie got a boost in early Asian trade when the RBA minutes suggested a more restrained tone. Although the central bank did note that an appreciating AUD could complicate adjustment, the market took the broad message of the minutes to mean that the RBA will remain on hold in June and July and may not ease until August. Aussie popped to .7366 before finally taking a breather and dropping back below .7350.

In North America today US CPI data will be the key economic event on the docket. The market expects a jump to 0.3% from 0.1% with core increasing to 0.2% from 0.1%. With gasoline prices now significantly higher the headline number could indeed climb higher which could provide a further lift to USD/JPY. The pair has been well in overnight trade rising to 109.65 and any upside reading in CPI data could spur a rally to test the 110.00 figure as the day proceeds.

Boris Schlossberg
Managing Director

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