Aussie Pops, Pound Drops but All Eyes on ISM

Market Drivers February 5, 2019
RBA surprises by its less dovish tone
UK Services PMI
Nikkei -.19% Dax 0.90%
Oil $54/bbl
Gold $1312/oz.

Europe and Asia:
AU AUD Retail Sales -0.4% vs. 0.0%
AU RBA 1.5%
UK GBP UK PMI Services 50.1 vs. 51.0

North America:
USD ISM Non-Manufacturing 10:00

Aussie was the big mover in Asian and early European trade today rising above the .7250 after falling through the .7200 earlier.

The pair was pulled and pushed by conflicting data as the sharp decline in Retail Sales which came in at -0.4% vs. 0.0 eyed was offset by better than expected Trade figures which printed at 3.6B vs. 2.3B forecast. But the real action came after the monthly RBA monetary policy statement which kept rates unchanged but otherwise took an much less dovish tone than the market expected.

The gist of RBA message was that the labor market remained strong with the unemployment rate expected to drop all the way to 4% over the next few years and that dynamic was likely to lead to stronger household spending which would offset any negative impact of the cooling housing market. This was a much more upbeat message than the market was anticipating and reflects a notable shift in RBA view that the Australian economy may be more resistant to the geopolitical shocks in global trade than previously thought. The Aussie popped through .7250 and remained near the highs of the day as the shorts were squeezed by the surprisingly upbeat tone.

No such rally in cable however as UK PMI Services – the most important of the three PMI releases tumbled to 50.1 from 51.0 forecast coming within a whisker of contraction. According to Markit new orders declined for the first time in 2 years. Markit noted that “Survey respondents overwhelmingly linked the slowdown in business activity growth to heightened political uncertainty at the start of 2019. A number of service providers reported that Brexit-related concerns had dampened client demand and resulted in delayed decision making on new projects. Sector data suggested that Transport & Communication and Financial Intermediation were the weakest performing areas of service sector activity. ”

Cable dipped towards the 1.3000 level but held above it in the aftermath of the release as traders essentially discounted all the bad Brexit news and focused on the final negotiations between EU and UK. On that front, there seemed to be little progress on the Irish backstop issue, but there may be some behind the scenes political dealing as neither UK nor EU wants a hard Brexit scenario. Cable’s quiet hold of the 1.3000 level has been essentially the signal that market is willing to give the benefit of doubt to the idea that both parties will arrive at some last-minute compromise to keep the UK in the customs union.

In North America today the major data point will be the ISM Non-Manufacturing report due at 15:00 GMT. The market is looking for a slight decline to 57.1 from 58.0 the month prior, although given the strong NFP data the market is now leaning towards a possible beat. Any print within consensus should help USDJPY stay bid helping to fuel the narrative that US economic activity remains more robust than expected. The pair has been hovering near the key 110.00 figure for the past 24 hours and any positive upside surprise on the data front could push it through the 110.00 level for good.