Cable -Start of New Rally as GDP Confirms Growth?

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Market Drivers July 28, 2015

Commdollars stabilize
Nikkei -0.10% Europe 0.41%
Oil $47/bbl
Gold $1096/oz.

hope but
Europe and Asia:
GBP UK GDP 0.7% vs. 0.7%

North America:

USD CC 10:00

The UK GDP data printed spot on target sparking a small relief rally in cable as the pair recovered all of its Asian session losses.

The UK Q2 GDP came in at 0.7% as expected with year on year gains printing at 2.6%. Mining and quarrying posted the biggest gains since 1989 but manufacturing declined the most since Q1 of 2013. On the other hand Industrial Production rose the most since 2010.

There were no glaring problems in the UK GDP report as the country recorded steady growth in Q2 that should provide support for normalization of monetary policy sooner rather than later. Its still unclear whether the BOE would consider hiking rates ahead of the Fed, but given today’s sound data there is little fundamental barrier to hike rates before the year end.

Cable popped on the news hitting a high of 1.5585 in post release trade as market participants were relieved that there were no downside surprises in the report. Prior to the news the pair saw heavy selling that pushed it lower towards the 1.5525 level.

Over the past week or so cable shown relative weakness retracing off the recent swing highs of 1.5800 despite the generally hawkish tone of MPC members and solid fundamental data. Part of the reason for the slide was the adjustment in EUR/GBP levels as euro staged a sharp short covering rally. However with EUR/USD run now seemingly stalled at the 1.1100 level cable may now get more attention from the market.

As one of the only two G-20 currencies developing a tightening monetary bias, sterling should begin to see more speculative flow into the unit as traders start to price in the prospect of rate hike before the year end. Today pop towards the 1.5600 figure may be the start of another rally to test the recent highs at 1.5800 as the correction of the past few weeks appears to be over.

Boris Schlossberg
Managing Director

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