Carney Squeezes Sterling Long Positions

 |  Includes: FXA, FXB, FXC, FXE, FXF, FXY, NZDS, UDN, UUP
by: Dean Popplewell

A mixed bag of UK data this morning has the pound on the move. Both jobless claims and average earnings missed their mark, while the unemployment rate slipped as expected to +6.8%. The claimant count fell by -25k (the market was looking for a -30k print). In addition to the better data, a lack of wage growth with average earnings up +1.3% in March compared to the +1.5% that was expected could be the "excuse" to be used by the BoE doves. Dovish members would be able to cite the lack of pickup in wage growth to indicate less of a necessity to hike UK rates. However, with UK spare capacity continuing to be used up there should not be any significant changes to when UK rates actually will begin to hike.

The market continues to look for clues on timing in this morning's quarterly inflation report. So far, everything has been following a "gradual and limited" script. A more "hawkish" BoE's QIR was expected, however, Carney failed to deliver. The market was supplied a report that continues to heed the same message with UK growth and inflation forecasts broadly unchanged and the estimate of slack remaining at 1-1.5%. Carney and company again reiterating this range of views should not have fixed-income dealers trying to price in earlier rate hikes. Basically, policy makers are signaling that the first rate hikes are to come in late Q1 or early Q2 2015. Governor Carney's comment that inflation is "benign" in the medium term has helped to send the GBP bull scuttling for the exits (£1.6785).

Overall, there is very little new information to digest and run with; this is allowing UK futures short-sterling contracts to gain and cable to come under renewed pressure. The GBP market has moved steadily lower from £1.6997 (May 6th) and with the pound trading well below the 10-DMA (£1.6890), this should weaken the overall structure. The non-committal QIR this morning has managed to take out the weak stop losses located south of the £1.6800 handle. The market was long and wanted to add to these positions. Convincing trading sub-£1.6800 will be able to break the bulls back in the short term and convince the market to sell GBP on rallies rather than buy support.

Sticking with inflation, it was noted that German annual prices picked up in April. In national terms, prices fell -0.2% last month earlier, but rallied +1.3% on the year. The data confirms other recent reports and heightens concerns that inflation in the eurozone remains dangerously low. Weak inflation does not allow for an economy to handle any shocks that affect prices that could lead to deflation particularly well – this is a greater scourge to any economy. Last month revealed that the eurozone's inflation rate stands pat at +0.7%, well below the ECB's desired target of +2%. This scenario is obviously putting enormous pressure on Draghi to initiate something at the next ECB meet on June 5th. In his last ECB press conference he more than alluded to the fact of the ECB being proactive on the next go around. Policy makers are "comfortable with acting next time." The Bundesbank stands ready to support the ECB and back an array of stimulus measures from the ECB. The German central bank has been more of an opponent rather than a supporter. This week's comments from BUBA are a significant step in a show of faith to combat low inflation. For Germany, its strong labor market has been sheltering it from the low inflation problems that most of the region's members are confronted with. The issue of German high wages could become more of a problem especially when periphery economies are capable in closing the efficiency gap.

The eurozone's economic recovery remains modest and vulnerable, as highlighted by this morning's disappointing Industrial Production headline. The regions that share the EUR fell in March – down -0.3% m/m and -0.1% y/y. Obviously, strong proof that there was no pickup across industry from Q1, unlike the strengthening in consumer demand and exports. The market will be picking over tomorrow's euro growth numbers for further clues. A slow and gradual pickup in the rate of growth is the general consensus for this year. But, will the rate of growth be strong enough to push the rate of inflation higher? This is the ECB's primary dilemma.

As noted yesterday, investors continue to span their investment scope and again are looking favorably on emerging market economies and assets. Investors are still heading towards Turkish equities and bonds. The TRY (2.8475) is obviously being supported by expectations of an ECB policy easing next month. Outright, USD/TRY break below 2.0678, the 50% fibo of Jan. 2013-14 rise should support TRY even further. However, beware of Asia they still have interest to sell more USDs, which is supporting the EUR on dips. Patience remains the market's friend.

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