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Pound Catches a Cold on Sluggish Wage Growth

Although geopolitical anxiety is still festering in the background, financial markets have focused their attention on fundamental economic drivers this morning, with a dearth of data to parse through as we hit the midway point of the week.    The much anticipated second quarter GDP numbers for the Japanese economy were released overnight, and you could almost hear a collective sigh from Prime Minister Abe and the rest of his government when the figures came in just slightly better than economists had forecast.    The modestly better than anticipated number was still an annualized contraction of 6.8% as the tax hike in April severed personal consumption which lead to private demand dropping by 5.0% over the quarter, though capital expenditures and external demand held up modestly better than forecast, helping the final GDP number narrowly miss the 7.1% decline that had been expected.    The substantial drawdown for growth in the real economy over the second quarter has more or less been priced in given the tax hike, with attention now turning to how the economy recovers in the penultimate quarter to assess whether the BoJ may have to look at more accommodative monetary policy measures to combat a downturn in demand from lagging effects of the sales tax hike.    Supportive comments from the economy minister and the narrow beat helped the Nikkei keep afloat, with the equity index posting a gain of 0.35% as USDJPY levitated off of the low-102s.

While a fairly significant contraction in the Japanese economy had been expected, what was unexpected was the dovish sounding Bank of England Governor across the pond, as Mr. Carney addressed the media to speak to the BoE’s quarterly inflation report.    Although the head of the BoE did mention economic slack was estimated to be running at only 1% of overall GDP, the cut in the forecast of wage growth to increase by only 1.25% in 2014 (from the originally projected 2.5%), illustrated the current slack in the labour market would take longer to absorb than the central bank had anticipated.    This assessment of stubbornly low wage growth comes on the heels of June’s employment numbers, which even with the jobless rate falling to 6.4%, still saw wage growth contract by 0.2% over the month.    With Carney and the BoE telegraphing a more cautious approach to monetary policy than a few months ago, traders and investors has scaled back expectations that rate hikes are just around the corner, with the 10-year Gilt sliding to 2.46% and the GBPUSD cratering into low 1.67s after a 0.5% drop, the pair’s lowest level since early June.

As we head into the North American open, S&P futures have taken a bit of hit and are off the overnight highs seen earlier in the session after Retail Sales for the month of July for the American economy missed expectations and were flat over the month. When you strip out the more volatile items such as gas and autos there was a 0.1% increase over the month, in addition to June’s number being revised higher from 0.5% to 0.6%; yet the prior month’s revisions have done little to hide the disappointment in the headline number, with the big dollar catching an offer tone across the majors, helping the Pound and Yen claw back some of their earlier losses.    As exposure to the USD is culled, the Loonie has seen some buying interest that has taken the pair back into the low-1.09s.    The economic calendar for Loonie traders is sparse until  Friday  when Manufacturing Sales hit the wires, with a strong number giving bulls a chance to see if they can convincingly take back the 1.08s.

Further reading:

Forex Analysis: GBP/USD Hits New Low at Major Support Level

US retail sales flat in July – USD slides

Scott Smith

Scott Smith

Scott Smith is a Senior Corporate Foreign Exchange Trader with Cambridge Mercantile Group and has a diverse background in the foreign exchange industry, with previous experience in both credit and trading related functions. Scott holds a Bachelor of Commerce degree from the University of Victoria, has completed all three levels of the Chartered Financial Analyst designation, and is currently working towards the Derivative Market Specialist certification offered through the Canadian Securities Institute. Cambridge Mercantile Group.