Pound at Multi-Year Highs as 1.7000 in View

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Market Drivers for May 6 2014

UK PMI Services beats

RBA keeps rates/policy unchanged

Nikkei -0.19% Europe -.21%

Oil $99/bbl

Gold $1311/oz.

Europe and Asia:

AUD RBA cash rate 2.5%

EU Final Services PMI 53.1 vs. 53.1

GBP UK PMI Services 58.7 vs. 57.9

EU Retail Sales 0.3% vs. -0.2%

North America:

USD Trade Balance 8:30 AM

CAD Ivey PMI 10:00 AM

Pound hit its highest level since 2009 in London morning trade today coming within reach of the the key 1.7000 level after UK PMI Services report surprised to the upside providing further evidence that UK economy is enjoying the best growth in the G-10 universe.

UK PMI Services Printed at 58.7 versus 57.6 with employment component rising to 56 from 53.5 – its best level since October 2013. The UK economy continues to fire on all cylinders as the composite index rose to 59.4 – well above the 50 boom/bust line.

Services is the largest component of the UK economy and today’s data provides further fuel to cable bulls who anticipate that the BoE will be the first of the G-7 central banks to raise rates perhaps later in the year. Indeed today’s OECD report increased its projection for UK growth to 3.2% from 2.4% forecast earlier, even as the organization lowered the growth rates for China and US.

Cable shot through the 1.6950 level in the wake of the news, but has since come off the highs of the day as it consolidated its gains. The pair has not been above the 1.7000 level for more than 5 years and the run towards that key figure is likely to meet stiff resistance from bears defending option barriers. However given the powerful fundamental support coming from UK data, cable is likely to take out 1.7000 in the foreseeable future as momentum favors the bulls.

Elsewhere, the news out of Europe was also mildly supportive with final PMI reading coming in line at 53.1 while Spain saw its unemployment rolls decrease by -111K versus -49K forecast. The marked pick up in demand in EZ periphery has been one of the key pillars of support for EZ growth this year and OECD today increased its forecast for the region to 1.2% from 1.0% prior.

The organization called on ECB to lower rates, but given the pickup in economic activity the central bank is likely to remain stationary at this week’s Thursday meeting despite the persistent deflationary pressure in Europe. Euro took out the 1.3900 level in late Asian trade as the dollar continues to suffer from the decline in US rates. The bond market which refuses to price in the prospect of growth in the US economy is putting a lid on any dollar rally which in turn only fuels the euro higher.

Today the North American calendar only carries US Trade data which is unlikely to have much impact on trade as focus will be once again on the US 10 year rates. Yesterday’s better than expected ISM data arrested the fall in rates providing some support for USD/JPY at the 102.00 level, but the pair remains mired near the week’s lows and could even drift towards the 101.50 level if bond yields continue to sink.

Boris Schlossberg
Managing Director

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