Cable Pounds Higher as PMIs Beat Big

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Market Drivers for August 5, 2013
NZD falls on milk ban, Aussie recovers from weak Retail Sales number
UK PMI Services
Nikkei -1.44% Europe 0.14%
Oil $107/bbl
Gold $1315/oz.

Europe and Asia:
AUD Retail Sales 0.0% vs. 0.4%
AUD AiG Performance of Services Index 39.4 vs. 41.5
AUD TD Securities Inflation 0.5% vs. 0.0%
EUR Euro-Zone PMI Services 49.8 vs. 49.6
EUR Euro-Zone Sentix Investor Confidence
GBP PMI Services 60.2 vs. 57.4

North America:
USD ISM Non-Manufacturing Composite – 10:00

UK PMI Services printed at is best level since 2006, lifting GBP/USD through the 1.5350 level in mid morning London trade today. In yet another example of rapidly improving UK economy the PMI services report rose to 60.2 from 57.4 eyed indicating that growth in Q3 should be considerably better than the start of the year.

Not long ago investors bemoaned the fact that UK economy was about to dip into a triple dip recession as GDP was about to contract for the third time since the financial crisis of 2008. However, economic condition in UK have clearly improved substantially over the past several months with the July PMI data beating forecast in all sectors. Indeed the combined PMI reading now stands at the highest level since records began in 1998 suggesting that the expansion is picking up upside momentum.

Cable rose to clear the the 1.5350 level and now stands ready to attack the key 1.5400 figure which has been a major point of resistance over the past several weeks. Despite robust economic data, sterling has weakened over the past few weeks as investors worried that the new BOE chief Mark Carney would take monetary policy into a more accomodative direction. However, so far Mr. Carney has shown little inclination to increase QE or lower rates and today’s very strong results demonstrate unequivocally that the UK economy is rebounding strongly without any additional stimulus.

Therefore, as suspicions regarding Mr, Carney’s dovishness begin to recede, the pound may find renewed strength and could trade towards the yearly highs of 1.5700 over the next several weeks.

Elsewhere in Asia, the kiwi came under heavy selling pressure at the start of the week’s trade after the country’s milk producer Fonterra announced that it may have made several bad batches tainted by botulism. China, Russia and a slew of Asian countries immediately suspended the imports of milk powder until Fonterra could reassure that the production was safe. Milk is one of New Zealand’s key imports and today’s news crushed the kiwi which dropped more than 100 points off its close to trade as lows at 7736 before recovering towards the 7780 level in morning European trade.

In North America today the key economic report will be the ISM Services release due at 14;00 GMT. But with NFPs already past us much of the excitement surrounding the data is gone. The markets are looking for a print of 53.2 a bit better than the 52.2 reading the month prior. If the data does match expectations it will be a welcome upside surprise for what has been a decidedly mixed US economic performance over the past month. If on the other hand it misses its mark, it could push the dollar even lower as the day proceeds with USD/JPY testing 98.00, EURUSD breaking above 1.3300 and GBPUSD challenging the 1.5400 mark.

Boris Schlossberg
Managing Director

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