Has UK Economy Bottomed Out?

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Market Drivers January, 24 2020
EU PMI mixed
UK PMI data beats but cable falls
Nikkei 0.13% Dax 1.37%
UST 10Y 1.74%
Oil $55.1/bbl
Gold $1561/oz
BTCUSD $8280

Europe and Asia:
EU Flash PMI 50.9 vs. 52.1
UK Flash PMI 52.9 vs. 51.1

North America:
CAD Retail Sales 8:30
USD Flash PMI 9:45

Currencies were generally flat in Asian and European trade today with the exception of cable which did a full reversal in London dealing despite the fact that UK flash PMI data surprised to the upside.

UK PMI flash PMI beat on both Manufacturing and Services with the Manufacturing report printing at 49.8 vs. 48.9 eyed while services rose to 52.9 versus 51 forecast. According to Markit, “January data from the IHS Markit / CIPS Flash UK Composite PMI® highlighted a decisive change of direction for the private sector economy at the start of 2020. Business activity expanded for the first time in five months, driven by the sharpest increase in new work since September 2018. “

The rise reflected fresh optimism in business after the Brexit saga was finally resolved suggesting a surge in pent up demand that should improve growth in Q1 of 2020. However after an initial pop higher sterling reversed course dropping below the 1.3100 figure as traders continued to bet on the possibility of a UK rate cut. Although the rebound in business optimism post-Brexit was a welcome relief, UK policymakers may want to “insure” that expansion takes hold and could still cut rates at the next BoE meeting to guarantee that monetary conditions remain accommodative

Cable still remains in short term uptrend and if UK data continues to stabilize the pair could mount a run towards 1.3300 over the next month but for now, the pair is under some profit-taking pressure.

In the US today, the market will get a look at flash PMI data for January as well. Up to now those reports have been generally ignored by the market as traders prefer to wait for the more established ISM data at the end of the month, but the recency of the flash PMI data could provide some insight into current demand conditions. The consensus view is for conditions to remain generally steady at 52.5 but if the number misses it could trigger a steep sell-off in risk given the parabolic rally in equities this month and could create some unexpected turbulence as we move into the weekend.

Boris Schlossberg
Managing Director

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