Cable Crumbles as UK Labor Data Misses

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Market Drivers for April 17, 2013
Early sell programs in DAX spill over into EURUSD
Weak UK labor data sends pound below 1.5300
Europe -.66% Nikkei -1.22%
Oil $88.35/bbl
Gold $1380/oz.

Europe and Asia:
JPY Consumer Confidence 44.7 vs. 46.7
GBP ILO Unemployment Rate 7.9% vs. 7.8%
GBP Claimant Count Rate -7K vs. 0K
GBP Average Weekly Earnings 0.8% vs. 1.4%

North America:
USD Fed Releases Beige Book 12:00
CAD BOC Rate Decision 8:00

A seesaw night of action in FX today with EURUSD bouncing between 1.3150 and 1.3200 on contradictory flows while cable was notably weaker after disappointing UK labor data showed rising unemployment. UK unemployment increased 7.9% from 7.8% anticipated even as claimant count showed some improvement by falling -7K versus 0K eyed. Overall, the number of people out of work in the U.K. rose 70,000 in the three months to February—the highest increase since September to November 2011.

The true sour note in the data however, was the very weak average earnings growth numbers which printed at 0.8% versus 1.4% forecast. This was the slowest rate of wage growth since records began and suggests that UK workers are continuing to fall behind in their purchasing power as inflation remains well above 2.5%.

The higher inflation data is also keeping the BOE on the sidelines as the MPC remains divided on further QE measures. Today’s BoE minutes revealed that UK monetary authorities remain split on additional stimulus measures with Governor Mervyn King, Miles and Fisher all voting to increase QE again but the other six members rejecting the idea. The minutes also indicated that BoE expects growth to be subdued given the weakness in the EZ economy.

With no stimulus on fiscal or monetary front the UK economy looks moribund for now and today’s data was viewed negatively by the market which sent cable through the 1.5300 level with shorts pressing the trade to test the support at 1.5250. Having failed at the 1.5400 figure cable now looks like its going to consolidate and may press lower as investors expectations for the UK economy are tempered. Given the weak rise in wages it is very likely that UK Retail Sales may miss their mark as well putting further downward pressure on growth in Q1 of this year.

Meanwhile EUR/USD bounced like a ping pong for most of the night as it first sold off towards the 1.3150 level on some very heavy futures related sell programs in the DAX, but then the pair rebounded to 1.3200 on spillover flows from EURGBP which broke above 8600 setting fresh monthly highs. The EUR/USD then proceeded to fall again towards the 1.3150 level as risk aversion flow took over again.

The surprisingly strong price action in the EUR/USD over the past several week has not been driven by any improvement in the fundamental picture, but rather by favorable movement in capital flows as Japanese and Chinese investors bought European bonds. Although the pair has rallied all the way to 1.3200 as result of this dynamic, the rally now may have run out of steam and will need some positive economic news to push the pair higher.

In North America today the focus will be on the loonie as the Bank of Canada issues its monthly statement. USD/CAD has risen back towards the 1.0250 level and may pop to test long term resistance at 1.0350 if the BOC remains dovish and dour on the prospects for growth going forward.

Boris Schlossberg
Managing Director

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