Dollar Rebounds, Cable Corrects as Focus Turns to US CPI

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Market Drivers January 18, 2017
Cable starts to unwind
UK Labor data beats
Nikkei 0.43% Dax 0.17%
Oil $52/bbl
Gold $1212/oz.

Europe and Asia:
GBP UK Claimant Count -10.1 vs. 5.0
GBP Average Weekly Wages 2.7% vs. 2.6%
EUR EU CPI 0.5% vs. 0.5%

North America:
USD CPI 8:30
USD MP/IP 9:15
CAD BOC Rate Decision 10:00
USD Beige Book 14:00

UK labor data beat on all fronts, but cable remained down on the day, as the pair retraced some of its massive gains from yesterday.

Cable rose nearly four big figures in yesterday’s trade after the speech by Prime Minister May laid out the path for an unambiguous exit from the EU single market. PM May made it clear that UK would follow through on its promise for a “hard Brexit” though she did make an accommodation for a gradual transition.

It’s hard to understand exactly why cable rallied so much in yesterday’s trade save for the fact that it was a classic “sell the rumor, buy the news” dynamic. The markets also took some solace from Ms. May’s promise that the Brexit deal would be put to a vote to both houses of Parliament, but post speech Cabinet official clarified that this is simply a vote to ratify the Brexit deal, rather than a vote on the issue of Brexit itself.

Although Ms. May is firm in her stance to proceed with full Brexit without a Parliamentary vote, her efforts may yet be frustrated by the ruling from the UK Supreme court expected later this month. Most legal expert agree that the court will most likely rule that a trigger of Article 50 which would be the official start of Brexit would indeed require a Parliamentary vote. The issue is further complicated by the announcement of Scottish PM Nicola Sturgeon that a second Scottish Independence referendum may be in store given Ms. May’s unambiguously “hard Brexit” posture. In either case there is enough uncertainty surrounding the issue, that a trigger of Article 50 in March or April could be in doubt, which provided support for cable for the time being.

Meanwhile on the economic front, the Labor data from UK surprised to the upside with claimant count declining to -10.1K from +5k eyed while average earnings rose 2.7% versus 2.6% forecast. The news shows that the UK labor market remains robust despite the concerns about Brexit, but job growth has clearly slowed as the 3 month on month numbers showed that -9K jobs were lost in contrast to 2015 when the UK economy was adding 200,000 jobs per quarter. Still all the eco metrics take backstage at this point as the market has no idea as what the real impact of Brexit will be and therefore the price action in GBPUSD today remains corrective for the time being.

Meanwhile in North America today, the eco data could play a bigger in trading as US releases the CPI figures. The market is expecting the year over year numbers to print at 2.2%, but if the report surprises to the upside it will only buttress the thesis that the Fed will do three rather than two rate hikes this year and that should provide support to both US yields and the buck. USD/JPY corrected heavily yesterday in the wake of comments by President- elect Trump, but the pair could rally back towards the 114.00 figure if the data proves supportive.

Boris Schlossberg
Managing Director

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