Cable Crumbles as Carney Casts Doubt on Rate Hike

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Market Drivers for August 13 2014

UK Average earnings decline -0.2% -slowest pace on record

Nikkei 0.35% Europe 0.85%

Oil $97/bbl

Gold $1309/oz.

Europe and Asia:

AUD Wage Price 0.5% vs. 0.8%

CNY IP 13.5% vs. 14.5%
CNY Retail Sales 12.2% vs. 12.5%
GBP UK Average Wage Earnings -0.2% vs. -0.1%
GBP Claimant Count -33K vs. -28K

North America:

USD Retail Sales 08:30

USD Business Inventories 10:00

Cable tumbled in morning London trade today breaking below the 1,6750 mark after BoE Governor Mark Carney noted that both wage and productivity gains were “disappointing” suggesting that the UK central bank will maintain its accommodative monetary policy longer than the market expects.

The UK central bank lowered its estimates for wage growth to 1.25% in 2014 from 2.5% previously forecast with Mr. Carney noting that there was heightened uncertainty about the slack in the UK economy. He went further by stating that even if spare capacity was eliminated overnight the right level of bank rate would be the current rate.

Mr. Carney’s emphasis on wage growth clearly indicates that the BoE is not yet ready to consider rate hikes as it sees inflationary pressures non-existent and is far more concerned about sustaining growth going forward.

The latest UK labor reports supports Mr. Carney’s view as the data shows improvement in job growth but absolutely no gain in wages. UK claimant count declined by -33K versus -29K eyed and the unemployment rate dropped to 6.4% from 6.5% the month prior. However average wage gains actually declined -0.2% versus -0.1% eyed – the worst reading since 2009.

As long as wage growth remains subdued the BoE is likely to keep rate stationery and that suggests further downside pressure on the pound. The pair rallied earlier in the summer on the expectations that the BoE will be the first central bank to raise rates in the G-7 but it is increasingly apparent that the BoE may keep rates on hold as long as the Fed and that could push cable towards the 1.6500 level over the medium term horizon. For now the pair appears to have found a modicum of support ahead of the 1.6700 figure but shorts may test that level during North American trade.

Elsewhere in Asia the Chinese data deluge came in mixed with most measures slightly missing their mark as Industrial Production printed at 13.5% versus 14.5% forecast while Retail Sales came in at 12.2% versus 12.5% projected. The Aussie saw a slight selloff in initial reaction but remained relatively well bid underneath the 9300 mark as the slowdown in Chinese activity was not drastic.

In North America today the focus turns to the US Retail Sales numbers which is the most important release of the week on the US calendar. The market is looking for a match of the 0.4% gain from the month prior, but if the data surprises to the upside the buck could see an extension of its gains. An improvement in Retail Sales would suggest that the gains in jobs are finally translating into healthier consumer demand which in turn will contribute to better US GDP growth going forward and open the prospect of a Fed rate hike in 2015.

USD/JPY is already trading well in Asian and European trade as it probed the 102.50 level and a strong report could put it on a path to test the 103.00 figure as the week proceeds.

Boris Schlossberg
Managing Director

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