Cable Drifts on Data, Will US Data Boost the Dollar?

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Market Drivers for February 5, 2014
UK PMI Services misses slightly
EU Retail Sales much worse than forecast
Nikkei 1.23% Europe .34%
Oil $98/bbl
Gold $1256/oz.

Europe and Asia:
AU Services PMI 49.3 vs. 46.1
GBP PMI Services 58.3 vs. 59.1
EUR Retail Sales -1.6% vs. -0.7%

North America:
USD ISM Services 10:00 AM

It been a generally lackluster night of trade in the currency market, but cable and euro weakened slightly in mid morning London trade after eco data from both regions disappointed expectations.

In UK the PMI Services report printed at 58.3 versus 59.1 eyed and a bit lower than the 58.8 reading from the month prior. New business reading slipped below 60, employment rose to 55.6 from 55.2 and the expectations component rose to 74.3 from 73.5. Overall it was decent report that indicates that the UK recovery remains on pace, but the markets were disappointed with the rate of change in growth which has slowed over the past several months.

After hitting a high of 62.5 in October the UK Services PMI report has declined every month since confirming the thesis that UK economic recovery may have peaked in Q4 of last year. The current reading puts the UK GDP growth for Q1 at 0.8% – which is a marked improvement from the year prior but not enough to jolt the BOE into a more neutral monetary posture.

With trader expectations now dampened, cable has seen a slow and steady selloff over the past week and the pair could drift lower to test key support at the 1.6200 level over the next several days. Tomorrow’s MPC statement is unlikely to offer any fresh guidance only adding to the view that UK monetary policy will remain accomodative for the foreseeable future.

In Europe the EZ Retail Sales missed their mark as well printing at -1.6% versus -0,6% expected as consumers in the region remain tightfisted. The report was weak across the board confirming the fact that demand in the EZ remains highly depressed. The euro saw very little reaction to the news maintaining bid above the 1.3500 figure as markets remain focused on the ECB meeting tomorrow.

Ahead of the meeting there is a considerable range of opinion as to what if anything the central bank will do. Any move to cut the deposit rate below 25bp will push the EUR/USD lower, but at present the consensus is mixed as to whether Mr. Draghi and company will make any material policy changes tomorrow rather than simply reaffirm their forward guidance.

In North America today the market will get a look at two key reports that will offer a good read on the state of the US economy. At 12:15 GMT the market will get the ADP report with consensus calls of about 191K reading and at 14:00 GMT the ISM Services report is expected to post a reading of 56.6 matching last months results.

Given the horrid NFP numbers last month and the very weak reading in ISM Manufacturing on Monday, fears are rising that growth in the US economy may be starting to slow to a crawl and if the slowdown persists it may force the Fed to reconsider its taper decision. That’s why if the data comes anywhere near the consensus the market will likely breath a sigh of relief and will rally the dollar.

Boris Schlossberg
Managing Director

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