Cable – Next Stop 1.3000?

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Market Drivers July 5, 2016

RBA on hold
GBP wobbles as 1.3200 given
Nikkei -0.67% Dax -1.28%
Oil $47/bbl
Gold $1347/oz.

Europe and Asia:
AUD Retail Sales 0.2% vs. 0.3%
AUD RBA at 1.75% as expected
EUR PMI Composite 53.1 vs. 52.8
GBP PMI Services 52.3 vs. 52.8

North America:
USD Durable Goods 8:30

Further worries about UK economy pressured the pound on the first full trading day of the week sending the unit to fresh multi year lows ahead of Bank of England’s Financial stability report due at 10:00 GMT.

Cable dropped to a low of 1.3130 as reports that some UK property funds have stopped issuing redemptions increased angst amongst the already anxious investors. The unit was further hurt by the latest reading from UK PMI services report which printed at 52.3 versus 52.8 eyed. Employment in the services sector – the largest part of the UK economy – saw the slowest growth in three years as business held off investment in the wake of the uncertainty caused by Brexit.

UK economy is now projected to grow at only 0.2% this quarter and may well tip into a recession by year end if as business confidence has fallen off the cliff in the aftermath of the Brexit vote. Many analysts now expect further easing from BOE and markets will be focused on Governor Carney’s words today as he delivers the Financial stability report, although he did say prior that the BOE will not make any policy decisions until next this month’s meeting July 14th. However given the shock to the system caused by Brexit, UK monetary policy is almost certain to turn more accomodative and that in turn is likely to push cable towards the 1.3000 figure in foreseeable future,

Elsewhere, the RBA remained pat keeping rates at 1.75% as expected and repeated its monetary policy statement near verbatim from the month prior albeit acknowledging the volatility caused by events in UK. Still for now Australian economy appears to be inured from the turbulence in Europe and the RBA is disinclined to ease rates further unless global financial turmoil begins to impact demand at home. The Aussie yo-yoed around the .7500 figure in the wake of the release but appears to be well bid as demand for carry continues to support the unit.

In Europe, Italian authorities announced a plan to recapitalize banks which have been slowly turning into a black hole of European finance as their balance sheets deteriorated markedly over the past year. The news was briefly cheered by the market with EUR/USD popping to 1.1180 before settling down below 1.1150. The pair has held up well and has performed strongly on a relative value basis with EUR/GBP nearly hitting the key .8500 level in morning London dealing. Still the 1.1200 level continues to be a key zone of resistance for the pair as markets remain wary of the fallout on the EZ economy from the Brexit vote.

In North America today the only report on the docket is Durable goods which is unlikely to have much impact on trade and flows in FX will likely be driven by equities as traders return to their desk after a long holiday weekend. With USD/JPY still under pressure any further decline in stocks could push the pair to a test of 101.00 as risk aversion flows continue to dominate markets in the wake of Brexit uncertainty.

Boris Schlossberg
Managing Director

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