Cable Rebounds as BOE Stays Still

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Market Driver for March 7, 2013
BOE leaves rates unchanged cable snaps higher
German Factory Orders slip
Nikkei 0.30% Europe 0.46%
Oil $90.70/bbl
Gold $1589/oz.

Europe and Asia:
AUD AiG Performance of Construction Index 45.6 vs. 36.2
AUD Trade Balance -1.06B vs. -0.51B
JPY Leading Index 96.3% vs. 96.2%
EUR ECB Rate Decision
EUR ECB Deposit Facility Rate
EUR German Factory Orders -1.9% vs. 0.6%
GBP BOE Rate Decision
GBP BOE Asset Purchase Target

North America:
USD Trade Balance 8:30
USD Initial Jobless Claims 8:30
USD Consumer Credit 15:00

Cable snapped higher in the wake of an unchanged decision by the BOE, rising through the 1.5050 level after posting fresh yearly lows in Asian trade. The bank issued a terse statement noting that,” Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £375 billion.”

There will be no indication as how the members voted until two week from now when the BOE will release its minutes. Cable dropped earlier in the day tripping a score of stops in thinly traded Asian session as it tumbled to a low of 1.4960 on speculation that the BOE might increase the QE program given the recent weakness in the UK economy. However, the members decided to hold off for now, perhaps on the assumption that some of the decline in demand in manufacturing and construction sectors could have been caused by seasonal factors and therefore was temporary.

UK Monetary authorities may have taken solace from the fact that PMI Services report increased for the second month in a row leading them to conclude that the economy was not as weak as indicated.

Cable popped on the news as a furious short covering rally squeezed the pair higher by more than 80 points in the aftermath of the announcement. The pair has now tested the 1.5000 level three times and has been able to rebound every time suggesting that it may have found a near bottom. Unless UK data continues to show further deterioration, sterling is likely to stabilize at these levels and could stage a short covering rally over the next several days. However, if the economic news continues to miss its mark, the pressure on BOE to ease further will increase exponentially and 1.5000 will give way in a much more sustained fashion.

With BOE news off the table the focus shifts to the ECB where no change is expected but traders will listen carefully to the presser following the announcement. With German Factory Orders contracting by -1.9% the news from Europe continues to depress and the downside risks shift to the euro leaving open the possibility that EURGBP could drift lower as the day goes by.

Boris Schlossberg
Managing Director

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