UK GDP Data Put Pound’s Rally in Question

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Market Drivers for August 24th, 2012
RBA’s Stevens- surprised Aussie isn’t lower
UK GDP revised upward but still at 3 year low
Nikkei -1.17% Europe -0.12%
Oil at $95.90/bbl
Gold at $1671/oz.

Europe and Asia:
AUD Conference Board Leading Index 0.2% vs. 0.3%
JPY Cabinet Office Monthly Economic Report reaffirms old policy
NZD Trade Balance 15M vs. – 15M
GBP GDP -0.5% as expected

North America:
USD Durable Goods Orders 8:30

Risk FX was generally quiet on the last trading day of the week as high beta currencies remained in narrow ranges absent any fresh news on the Greek bailout negotiations and a relatively barren economic calendar. The one exception was the Aussie which slipped through the 1.0400 level on concerns that growth Down Under may have peaked.

The pair came under an assault from sellers after RBA Governor Glenn Stevens noted that he was surprised the local unit hasn’t fallen more sharply in response to lower commodity prices and a slowing global economy.

Mr. Stevens declined to provide specific targets for the Aussie but added that, “”We’re not talking 20 cents worth”. Nevertheless, the Australian monetary officials are clearly somewhat concerned about the strength the Australian dollar amidst growing signs of slowdown of demand from China. Yesterday’s Chinese PMI data showed further deterioration in the country’s manufacturing sector suggesting that forward growth will tepid at best.

Elsewhere the 2nd revision of UK GDP data printed in line at -0.5% versus -0.7% initially reported. This was an improvement from the first reading but was essentially in line with market expectations and still represented the worst showing for the UK economy in 3 years. The largest drag on growth came from net exports which cut quarterly GDP growth by 1 percentage point, the biggest such impact since Q2 of 1998. Household spending fell 0.4% on the quarter in Q2 and was down 0.8% on the year while investment was down 1.5% on the quarter, cutting GDP quarterly growth by 0.1 percentage point.

Overall the performance in Q2 offered little solace to the bulls as it painted a picture of an economy in a clear recession. Q3 numbers are likely to see some improvement given the boost from the London Olympics but UK economy appears to be suffering from chronic malaise as consumer demand remains weak. Given that dynamic the recent rise in the cable could face headwinds as markets to reassess its value as safe haven harbor. The GBP/USD pair recently broke out through long term resistance at the 1.5800 barrier but if it dips below that today it could signal a steeper correction for the unit.

In North America today the calendar only carries Durable Goods data which is notoriously volatile although the consensus call is for a rebound of 0.5% from -1.4% the month prior. The news in unlikely to have much impact on the market and trade for the rest of the day may governed by technical factors and position squaring ahead of the weekend. EURUSD has been oscillating between 1.2500-1.2600 for the past 24 hours and could either way depending on who has the momentum into the week’s close.

Boris Schlossberg
Managing Director

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