Sterling Doesn’t Sink Despite Weakest Data in 3 Years

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Market Drivers Mar. 3, 2016

UK Services grow at slowest rate in 3 years
AU Jan Trade data better
Nikkei 1.28% Dax 0.04%
Oil $35/bbl
Gold $1242/oz

Europe and Asia:
AUD Trade Balance -2.9B vs. -3.2B
GBP UK PMI Services 52.7 vs. 55.1
EUR Retail Sales 0.4% vs. 0.1%

North America:
USD Weekly Jobless 8:30
USD ISM Non- Manufacturing 10:00

UK Services sector grew at the slowest pace in 3 years, but the surprisingly weak readings had no impact on cable which continued its recovery holding comfortably above the 1.4000 level.

UK PMI Services came in at 52.7 versus 55.1 its worst reading since April of 2013 as growth in the biggest sector of the UK economy slowed markedly. New orders fell to the lowest level in 3 years and inflation readings remained low. Overall, this has been one of the worst performance weeks for UK economy in months as all three PMI gauges showed serious declines. Nevertheless the three indices remain above the key 50 boom/bust level indicating that UK economy continues to expand albeit at a much slower pace than the market anticipated.

The news bodes badly for Q2 GDP with analysts likely to lower forecasts as demand has clearly dampened. Still sterling for all intents and purposes ignored the data as it held well above the 1.4000 level in mid morning London dealing. After the relentless selloff of the past month cable is so grossly oversold that bad economic data may not have much impact on the pair. The pound has been largely sold on fears of Brexit and for now it appears that those fears have eased as the Leave vote has not picked up any more momentum.

Whether UK stays or leaves the European Union remains to be seen, but for now the currency market seems to believe that cooler heads will prevail and the relentless selling of cable has ceased. Yet even if the threat of Brexit passes the economic damage may have already been done as this week’s data clearly shows. The slowdown in UK economy is unlikely to reverse quickly and that mean whatever short covering bounce cable sees at the moment, it will run out of gas at the 1.4200 -1.4300 range.

Elsewhere data in Europe was slightly better with Retail Sales coming in at 2.00% vs. 1.3% on a year over year basis, but EUR/USD remains contained to it 1.09-1.0800 range that it’s been stuck in all week. The pair is just treading water until the ECB meeting next week as market tries to get guidance from Mr. Draghi and company.

In North America today the focus will be on ISM Non-Manufacturing report and more importantly its employment component which tends to be a good forecaster of NFPs due tomorrow. The forecast is for a slight decline to 53.1 from 53,5 th month prior, but if the ISM data can surprise to the upside as the Manufacturing report did yesterday then USD/JPY could make another run at the 114.50 level. So far the 114.50-115 corridor has proven to be solid resistance in the pair recovery off its lows, but with US data now surprising to the upside, market sentiment may shift as trader once again begin to anticipate Fed tightening. With US economic momentum beating expectations USD/JPY may have further to run.

Boris Schlossberg
Managing Director

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