Has UK Growth Peaked? GBP/USD Shrugs Off Data

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Market Drivers for January 6, 2014
UK PMI Services
HSBC China service PMI misses drags yen crosses lower, but USD/JPY rebounds
Nikkei -2.35% Europe -.14%
Oil $94/bbl
Gold $1237/oz.

Europe and Asia:
AUD AIG services 46.1 vs. 48.9
CNY falls to 50.9
GBP Services PMI 58.8 vs. 60.4

North America:
USD Final Services PMI 9:00
USD ISM Non-Manufcaturing 10:00

Risk FX was mildly lower at the start of the first full trading week of the new year as PMI data from around the globe missed expectations suggesting that the rate of expansion may have decelerated in December.

In UK the PMI Services printed at 58.8 versus 60.4 eyed recording its second month over month decline in a row indicating that the torrid pace of growth in the UK economy may be starting to cool. The headline number showed that business activity growth has dropped to a six month low, but the topline disappointment was somewhat offset by the news that new business order rose sharply suggesting that final demand remains robust for the time being.

Cable fell 30 points in reaction to the news dropping to a low of 1.6336, but the pair quickly found buyers below the 1.6350 level and recovered nearly all of its losses by mid morning London dealing. The pair has sold off sharply at the start of the new year as traders trimmed their longs in the wake of a series of disappointing PMI numbers and it may simply be consolidating before starting a fresh leg lower.

Certainly for now pound has become a sell the rally trade as growth – though still impressive – appears to have peaked for now which will likely allow the BoE to maintain its highly accomodative monetary policy for a while longer.

Elsewhere, in Asia the HSBC China Services PMI also missed its mark printing at 50.9 which was the lowest level since August 2011. The news pushed AUD/USD through the 8950 level but corporate demand provided support for the pair and it recovered during European trade. The weak Chinese data also pushed the yen crosses lower after Nikkei dropped by more than -2% but USD/JPY once again held the 104.00 level and remained calm at 104.50 during morning European dealing.

In North America today all eyes will turn to ISM Services as currency traders try to gauge the strength of the US economy and get a leg up on the NFP data due at the end of the week. Market consensus is for a print of 54.6 versus 53.9 the month prior and if the data matches or beats expectations USD/JPY could climb towards 105.00 as the day progresses. However if the headline number shows a contraction from the month prior, the 104.00 figure which so far has held up under every assault by the sellers could finally give way as currency markets temper their assessment of US growth.

Boris Schlossberg
Managing Director

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