Is UK GDP Stronger than it Looks?

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Market Drivers October 27, 2015

UK GDP misses at 0.5% vs. 0.6%
USD/JPY below 120.50 as risk aversion hits
Nikkei -0.90% Europe -0.39%
Oil $43/bbl
Gold $1166/oz

Europe and Asia:
NZD Trade Balance -1.22M vs. -880M
GBP UK GBP 0.5% vs. 0.6%

North America:
USD Durable Goods 8:30

USD Consumer Confidence 10:00

UK GDP missed its mark in early London trade sending cable to a test of the 1.5300 level but the pair found some support ahead of the figure as traders viewed the 1st reading of the figures as incomplete.

With the first reading of UK GDP only covering 50% of the data which mainly focused on the output component of the economy traders were more forgiving of the miss as the release printed at 0.5% versus 0.6% eyed. This was the weakest reading since Q1 with Index of Services also missing its forecast at 0.9% versus 1.0% projected.

With two more revisions of the GDP still to come the prospect of the an upward revision are high especially given the fact that UK Retail Sales have proven to be much stronger than anticipated adding to the overall growth in demand.

In many ways the UK economy remains the shining star in the G-7 universe as the rise in wages, employment and steady GDP gains make it the best prospect for monetary policy normalization. However the Bank of England remains cautious in its approach and with inflation readings remaining tame, it sees no need to move rapidly to tighten policy. Indeed Finance minister Osbourne reaffirmed that cautious stance today by stating that UK GDP figures show that the economy faces “clear global risks.”

Cable therefore may tread ground until tomorrow’s FOMC meeting. The market continues to believe that UK policy makers will not move on rates until US authorities do, so traders will be watching Ms. Yellen’s comments carefully.

Elsewhere the European session was marked by mild risk aversion flows with euro doing an about face as it dove to 1.1035 from 1.1070 on the back of a decline in EUR/JPY which hit seven week lows. The biggest victim of risk off flows was USD/JPY which broke below 120.50 and remained weak on the session. Today’s US calendar brings Durable Goods and Consumer confidence numbers and if the data is weak it could push the pair to a test of 120.00 level as the day proceeds.

Boris Schlossberg
Managing Director

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