Cable Rebound Squashed by Cool Inflation Data

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Market Drivers for January 13, 2014
USD/JPY recovers in Asia as Japanese Current Account deficit hits record high
Cable rebound peters out after inflation data prints cool
Nikkei -3.08% Europe -.57%
Oil $92/bbl
Gold $1248/oz.

Europe and Asia:
JPY Current Account -0.05T vs.-0.02T
GBP UK CPI 2.0% vs. 2.1%

North America:
USD Retail Sales 8:30 EST
USD Business Inventories 10:00 EST

The currency markets remained in relatively tight ranges in Asian and early European trade today with some pairs trying to stage rebounds after sharp selloffs yesterday. Both USD/JPY and GBP/USD retraced some of their losses but trading remained cautious ahead of today’s much anticipated US Retail Sales report.

Cable rose to a high of 1.6446 nearly 100 points off yesterday’s intra-day lows, but the rally ran out of steam after UK CPI data printed cooler than forecast. UK CPI came in at 2.0% versus 2.1% eyed as price pressures continued to ease for the fourth month in a row. This was the lowest CPI reading in nearly four years suggesting that UK’s battle with inflation may be finally ending.

The news drove cable lower as it eased any pressure on the BoE to tighten monetary policy for the foreseeable future. Indeed, the UK central bank has remained highly accomodative arguing that the inflation rate would decline naturally and today’s data has proven the policymakers correct. Pound traders will now turn to the UK Retail Sales report this Friday for next directional clue about the the UK economy. The last four releases from UK have missed their mark suggesting that the pace of growth may have peaked in Q4 of last year. If Friday’s report confirms those suspicions then cable could drift lower testing the 1.6250 level by end of the week.

In Japan the November current account deficit ballooned to ¥ -592.8B – the largest gap on record – as consumers rushed to buy imports ahead of the proposed sales tax hike this year. The record deficit was also driven by energy imports as the country continued to import fuels keeping all of its nuclear reactors closed for the time being.

The rise in the Current Account deficit was viewed as negative for the yen and USD/JPY rose throughout the Asian trade despite a sharp selloff in the Nikkei which was down by more than -3%. The price action could turn once again during North American trade if the US Retail Sales number misses its mark.

The market is already anticipating a lackluster number with forecasts set at 0.2% versus 0.7% the month prior. However, with many US retailers reporting very weak end of year sales the prospect of a downward surprise is quite large. If the Retails Sales data does miss, it could send financial markets into another steep selloff as traders will begin to question the “escape velocity” thesis for US economic growth this year. USD/JPY will likely come under renewed downward pressure especially if US rates continue to compress and could retest yesterday’s lows near the 102.80 level as the day proceeds.

Boris Schlossberg
Managing Director

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