Cable Weakens on Peak Growth Worries, USD/JPY Slides Below 102.00

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Market Drivers for February 3, 2014
UK PMI Manufacturing 56.7 vs. 57.1
Final EUR PMI 54.00 vs. 53.9
Nikkei -1.98% Europe -.66%
Oil $97/bbl
Gold $1243/oz.

Europe and Asia:
AU Building Approvals -2.9% vs. -0.3%
GBP UK PMI Manufacturing 56.7 vs. 57.1
EUR Final PMI 54.0 vs. 53.9

North America:
USD Final PMI Manufacturing 9:00 AM
USD ISM Manufacturing 10:00 AM

A generally very quiet night of trade in the currency market with majors tracing out narrow ranges on the first day of the week, with some markets still closed for Chinese New Year. The EUR/USD firmed up a bit trading through the 1.3500 level in mid morning London dealing as the final Manufacturing PMI data proved to be slightly better than expected at 54.0 vs, 53.9 eyed.

The better PMI readings were helped by an impressive improvement in Spain which saw the numbers rise to 52.2 versus 51.3 eyed. This was the second consecutive monthly reading above the 50 boom/bust line suggesting that Spanish economy may be finally on track to growth. Still the data from rest of the periphery was uneven with Italian PMI numbers slipping a bit to 53.1 from 54.2 suggesting that the EZ economy remains quite sluggish with demand tepid at best.

In contrast to the euro which saw a bit of short covering rally that popped the pair through 1.3500 to a high of 1.3515, cable was considerably weaker in European trade sliding to a low of 1.6345 after UK PMI Manufacturing data printed a bit below expectations at 56.7 versus 57.1 eyed. Although the headline reading was a bit softer the new orders component surged to news highs, but the market ignored the underlying data and sold sterling on the headline number as traders continue to worry that UK economic growth may have peaked in Q4 of last year.

Cable has failed several times this year at its attempt to break above the key 1.6600 level suggesting that the six months rally from 1.4800 may be running out of steam as the BoE is unlikely to tighten monetary policy anytime soon unless the economic indicators improve markedly from current levels. This week the market will get a look at the UK Construction and Services PMI reports and if those miss their mark, the pound could slide towards the 1.6200 figure as profit taking accelerates.

In North America today the markets will get a look at two US PMI readings with the final US Manufacturing PMI expected to print at 53.8 while the ISM Manufacturing is expected to come in at 56.2 versus 57.0 the month prior. If the news prints in line it could provide some relief for US investors and help spur short covering rally in yen pairs. However if the data proves to be another disappointment equities could extend their losses and could push USD/JPY – which has already weakenned considerably in European trade – towards a test of the the key 101.50 support as the day proceeds.

Boris Schlossberg
Managing Director

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