Has Cable Topped Out?

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Market Drivers for February 19, 2014
UK Labor data show unemployment rise to 7.2% from 7.0% eyed
MPC minutes reveal unanimous agreement keep rates and QE on hold
Nikkei -0.52% Europe -0.27%
Oil $102/bbl
Gold $1320/oz.

Europe and Asia:
AU LEI -0.2% vs. 0.1%
AU Wage Price index 0.7% vs. 0.7%
UK Jobless claims -27K vs. -20K
UK Unemployment rate 7.2% vs. 7.1%
UK Average earnings 1.1% vs. 0.9%

North America:
USD Building Permits 8:30 AM
USD Housing Starts 8:30 AM

Cable dropped through the 1.6700 level in morning London trade today after UK labor data revealed a jump in the unemployment rate to 7.2%. The market was anticipating a drop to the key 7.0% level from last months 7.1% reading. The surprising jump in the unemployment rate overshadowed what was an otherwise upbeat report as both claimant count and the average earnings index beat expectations.

UK claimant count declined by another -27K versus forecasts of -20K drop while average earnings rose by 1.1% versus 0.9% projected. This was the 52nd consecutive month of negative wage growth but as inflation measures have declined and earnings risen the gap has slowly narrowed.

Several analysts have noted that the uptick in the unemployment rate is likely to be temporary as growth in the UK economy is likely to persist in 2014. Nevertheless this was the second negative surprise out of UK this week, after yesterday’s weaker than expected CPI data and market sentiment towards the unit has clearly soured.

In addition to the weaker than expected unemployment numbers cable was also pressured a bit by the release of the MPC minutes. The minutes essentially reaffirmed the policy as the members voted unanimously to keep rates and QE measures the same, but takeaway line from the meeting was that there was room to absorb spare capacity before rate increases. The MPC is clearly trying to temper market expectations regarding any tightening as policymakers continue to believe that UK economy has plenty of slack still left in it.

Cable which spiked to a fresh yearly high of 1.6825 at the start of the week may have set a near term top for now and could spend the rest of this week consolidating towards the 1.6500 figure as profit taking kicks in. The BoE is clearly displeased with any further appreciation in the unit as it fears that higher exchange rates could crimp the recovery in the export sector and therefore the communication from policymakers is likely to remain dovish for the time being.

In North America today, the morning docket has smattering of housing data which may once again be skewed by the bad weather patterns of the past month, but focus will quickly shift to the FOMC minutes due at 1900 GMT. The minutes are likely to reaffirm that the FOMC will stay the course, but traders will be interested to see if policymakers express any concerns about the recent slowdown in US economic activity. The dollar has come under heavy selling pressure over the past week as US eco data has consistently disappointed. If the FOMC minutes reveal the same type of concern amongst US policymakers, the buck could see further selling with EUR/USD targeting the key 1.3800 level as the day proceeds.

Boris Schlossberg
Managing Director

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