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Pound, Aussie Survive “Do-or-Die” Data

By Boris Schlossberg
05 March 2013 21:20 GMT

With services and retail sales data surprising to the upside overnight, the British pound and Australian dollar could now put in short-term bottoms versus the dollar, halting their steady recent losses.

A better-than-expected UK PMI services report, stronger consumer spending out of Australia, and a relatively sanguine tone from the Reserve Bank of Australia (RBA) all helped to drive risk currencies higher, and both the British pound (GBP) and Australian dollar (AUD) rebounded from the lows set at the start of the week. European equity markets also benefited from the news, posting strong gains on the back of better investor sentiment.

The GBPUSD pair shot up to test the 1.5200 barrier in the wake of a better-than-anticipated UK PMI services report, which printed at 51.8 versus 51.0 expected. The index rose to a five-month high, while employment and confidence readings reached their best levels in nine months.

The PMI services number stood in sharp contrast to the UK manufacturing and construction reports from last week, which showed continued contraction in both sectors. Fortunately for the UK economy, the services sector dwarfs both manufacturing and construction, providing some cause for optimism that Q1 UK GDP may not contract for the second quarter in a row.

The better PMI services reading also dovetails with the stronger BRC report and the surprisingly robust labor data, indicating that the slowdown fears regarding the UK economy may have been slightly overblown. We noted here yesterday that the PMI services report was the “last glimmer of hope” for sterling bulls, and today's beat should provide some support for the pair, which found strong support underneath the 1.5000 level yesterday.

With the market still structurally short sterling, the pair may see a further rebound as Tuesday trade progresses. There is a very chunky area of resistance at the 1.5220 level, but if GBPUSD can clear those offers, the pair could quickly rise towards the 1.5300 level as the short squeeze continues. For now, it continues to consolidate between 1.5150-1.5200, with 1.5000 representing confirmed support for the time being.

Dodging Economic Bullets Down Under

In Australia, better-than-expected retail sales data provided some relief and cover for the RBA. Retail sales rose 0.9% versus 0.4% expected, and this was the first month out of the past three that saw an improvement, indicating that consumer demand down under is starting to stabilize after several months of contraction.

Meanwhile, the RBA repeated the last paragraph from the prior month's meeting verbatim, noting that there was "scope for further easing." However, recent commentary from Australian monetary officials suggests that authorities are satisfied with the current monetary accommodations and believe that the stimulus already provided has yet to fully make its way through the system. Indeed, today's statement was generally a bit more upbeat regarding economic growth going forward.

The news helped to push AUDUSD higher, with the pair hitting 1.0250 before profit taking kicked in. The Aussie has been under relentless selling pressure for the past several weeks, but today's mildly hawkish RBA statement suggests that the central bank will remain stationary for the foreseeable future, as aggregate demand appears to be improving. Therefore, the pair may have made a short-term bottom for now and could recover towards the 1.0300 level as the week progresses.

EURUSD Finds Support…for Now

In Europe, the economic calendar has been relatively quiet with only final PMI readings and retail sales on the docket. The PMI report showed a slight improvement for both France and the overall readings, but remained deeply within contractionary territory.

Retail sales saw a jump of 1.2%, but much of it was anticipated after German retail sales saw their biggest increase in six years. The EURUSD pair churned higher towards the 1.3070 level, but the rally ran out of gas by mid-morning in European trading.

This pair has found support near the 1.3000 level, but forward progress remains slow, as investors continue to warily eye the developments in Italy. With no progress on the political front, currencies may take their cue from equities when North America comes online.

Today's ISM services report will be the marquee event of the day, and if the data beats expectations—like ISM manufacturing did on Friday—then the risk rally is likely to extend.

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By Boris Schlossberg of BK Asset Management

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05 March 2013 21:20 GMT