Cable Clipped on Weak MP-Has UK Growth Peaked?

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Market Drivers for January 10, 2014
Chinese Trade misses but imports higher at 8.3% vs. 5.0%
UK MP/IP disappoints 0.0% vs. 0.4%
Nikkei 0.20% Europe .57%
Oil $92/bbl
Gold $1234/oz.

Europe and Asia:
CNY Trade 25.6B vs. 32.6B
EUR French IP 1.3% vs. 0.6%
UK MP/IP 0.0% vs. 0.4%

North America:
USD NFP 8:30
CAD Employment 8:30

UK Industrial Production missed its mark printing at 0.0% versus 0.4% eyed and sending cable to session lows in morning London dealing as the pair tested support at the 1.6400 level. This is the third major data point this month that has printed below consensus view suggesting that growth in UK economy may have peaked in Q4 of last year.

Some analysts have called on the BoE to move away from its ultra-accomodative monetary stance given the surprising strength of the UK economic recovery and have even called on the MPC to raise rates in 2014. However as the most recent UK data has shown with both the PMI Services and Manufacturing reports and now the Industrial Production numbers, growth is beginning to decelerate and that is likely to keep the BoE policy stationary for the time being.

Cable has remained relatively well bid holding near the yearly highs at the 1.6600 level since the start of the year as currency traders continue to be enthusiastic about UK economic prospects in 2014. However, that sentiment may begin to change if the market receives more disappointing news as the month progresses. Next week’s Retail Sales report now looms very large as a measure of consumer strength. Given the weaker Christmas season data from the major UK retailers and the drop in the BRC monitor to 0.4% from 0.8% expected – the chances of another data point miss are relatively high.

Cable, so far has managed to hold ground ahead of the 1.6400 barrier, but the pair remains vulnerable to more downside action especially if today’s NFP report beats the consensus view. Markets are looking at 196K and anything around the 200K should prove dollar positive as the day proceeds.

Our colleague Kathy Lien noted in yesterday’s NFP preview that “there are far more arguments in favor of stronger than weaker payrolls. In fact the only leading indicator that points to a decline in job growth is jobless claims and it did a poor job of tracking NFPs last year.” If the NFP do print north of the 200K mark the dollar rally could propel USD/JPY through the key 105.50 barrier. The pair has been stymied by option related selling for the past two weeks but an unequivocally stronger employment report could finally send it to fresh yearly highs.

Boris Schlossberg
Managing Director

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