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Cable Remains the Weakest Link Ahead of NFP

Last updated 9/3/2010 6:00 AM ET (GMT -5) 2 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• UK Services PMI much weaker than forecast at 51.3 vs. 53 eyed
• All eyes on the NFP
• Nikkei up 0.5% Europe flat on open
• Oil off a bit at $74.65/bbl
• Gold above the $1250/oz. mark at $1254/oz. last

Overnight Eco

• AUD AIG Services Index 47.5 vs. 46.6 last
• JPY Capital Spending q/y -.1.7% vs. -6.6%
• CHF CPI m/m 0.0% vs 0.1%
• EUR Final Services PMI 55.9 vs. 55.6
• EUR Retail Sales m/m 1.1% vs. 0.6%
• GBP Services PMI 51.3 vs.53.0

Event Risk on Tap

• USD Non-Farm Employment Change expected at -103K
• USD Unemployment Rate expected at 9.6%
• USD Average Hourly Earnings m/m expected at 0.1%
• USD ISM Non-Manufacturing PMI expected at 53.6

Price Action

• USD/JPY quietly pivoting 84.25
• AUD/USD holds near .9100 ahead of NFP
• GBP/USD falls below 1.5400 once again on weak Services PMI
• EUR/USD steady above 1.2800 on good revised PMI data

On an otherwise typically quiet pre-NFP night of trade, the pound came under pressure once again after UK Services PMI missed by a wide margin printing at 51.3 versus 53.0 eyed. This was the weakest Services PMI reading since April of last year and the third PMI gauge to miss expectations this week suggesting that Q3 growth in the UK economy will slow markedly.

Services, which comprise more than 70% of the UK business activity are the key barometer of the country's economic health and today’s third consecutive monthly  decline in the PMI reading indicates that the probability of a double dip recession have increased. While the  gauge still remains slightly above the 50 boom/bust line the general trend suggests it could slip into contraction by Q4 of this year.

Cable instantly sold off on the news dropping about 40 points in the aftermath of the release, but it remains relatively well bid at the 1.5400 level as traders await the NFP data later today.  Overall the market remains relatively nonchalant with respect to the poor UK data, but we continue to believe that it ignores the facts at its own risk. As we noted yesterday, “The UK economy remains very vulnerable to the triple threat of declining house asset prices, weaker capital markets and the onset of fiscal austerity measures as we enter the fall season.”  Given these dynamics the 1.5000 level in GBP/USD could be breached within the next few weeks.

The EUR/USD meanwhile held steady during the early morning European trade boosted by an upward revision in services PMI and better than expected Retail Sales data.  The final services PMI for August  came in at 55.9 up from 55.6 initial estimates indicating that the recovery in the EZ remains on track. The print was slightly below June 56.2 peak reading but still well into expansionary territory.  Similarly Retail Sales rose by 1.1% from a year ago, but there was some regional variation in the data with Spain still lagging the rest of the union.

Today’s NFP are expected to print at -101K versus -131K the month prior and as our colleague Kathy Lien noted most signs point to a stronger payroll number. If the number does print to the upside the clearest dollar positive reaction  will be in   USD/JPY with the pair likely taking out the 85.00 figure to the upside. However the trade in EUR/USD will be difficult to gauge as markets may be torn between positive US data which should favor the buck versus the likely increase in risk flows which will be beneficial to the euro. On the other hand if the number misses expectations we believe the EUR/USD will rally to 1.2900 irrespective of the risk aversion moves in the other markets as currency traders start  to price in the outperformance  of the European economy as we head into the end of the year.

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Comments (2)

JudyYap

September 03, 2010 at 07:12 AM ET

Hi Boris

Are you the owner of BK Forex Advisor?

Thanks.

bschlossberg

September 03, 2010 at 07:41 AM ET

Yes but please direct all questions to contact@bkforexadvisors.com

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.