Lack of Wage Growth Frustrates Pound Rally

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Market Drivers for July 16 2014

China GDP at 7.5% vs. 7.4% eyed

Nikkei 0.10% Europe 1.32%

Oil $100/bbl

Gold $1298/oz.

Europe and Asia:

CNY GDP 7.5% vs. 7.4%

GBP UK Labor -36.3K vs. -27.1K

GBP UK Wage growth 0.3% vs. 05%

EUR Trade Balance 15.3B vs. 16.3B

North America:

USD PPI 8:30

USD IP 9:15

CAD BOC statement 10:00

USD Yellen testifies 10:00

Commodity dollars were weaker in Asian and early European trade as mixed data from New Zealand and China kept the pressure on kiwi and Aussie, while mixed results in UK labor data capped the rally in cable below the key 1.7150 mark.

In New Zealand the combination of cooler than expected CPI figures which printed at 0.3% versus 0.4% eyed and yet another weak dairy auction put the pressure on the kiwi and the unit fell through the 8700 figure dropping more than 100 points from yesterday’s North American trade.

The market is coming to a conclusion that the RBNZ may end its tightening cycle at current levels as the slowdown in activity and tepid inflation data serve to offset the strong housing market. The kiwi appears to have formed a double top at the .8800 level for now and may continue to correct for another 100 points as speculators lose their appetite for the pair.

Meanwhile Aussie was also under pressure today despite the fact that Chinese GDP data was better than expected at 7.5% versus 7.4% forecast. However other data points were not as strong with Retail Sales rising 12.4% versus 12.5% projected. Still it was a solid number out of China suggesting that Asia’s largest economy continues to generate steady growth. The Aussie however took no solace from the news as the pair continued its correction touching a low of 9328 before rebounding towards the 9350 level.

In UK the labor numbers once again beat forecasts with claimant count declining to -36.3K eyed versus -27.1K forecast and the unemployment rate dropping another 10 basis points to 6.5% from 6.6% the month prior. Cable however, sold off on the news as the average earnings index rose a paltry 0.3% versus 0.5% eyed.

With wage inflation still non existent the BOE much like the Fed has ample time to keep its interest rate policy at current low levels despite the fact that job growth remains robust. The market was clearly disappointed in today’s numbers especially in light of yesterday hotter than expected UK CPI data. However, until wages begin to rise, the UK central bank may choose to remain stationary capping any upside in the pound.

In North America today the focus will be once again on Janet Yellen as the Fed chief testifies before Congress for the second day. Yesterday’s proceedings offered no new information as Ms. Yellen remained generally non-committal on Fed’s time table for rate hikes. She is unlikely to change her stance much today so the price action could remain contained for the rest of the day.

Boris Schlossberg
Managing Director

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