Dismal Data Undercuts Sterling And Boosts Chances Of A Rate Cut

The UK's industrial output fell 1.2% compared with economists' expectations for a flat report.  Manufacturing fell a sharp 1.7% compared with median forecasts for 0.2% slippage. Services contracted by 0.3%. It was expected to be unchanged. There were a couple of bright spots in the flurry of data. Construction spending jumped 1.9%, three-times more than anticipated, and the goods trade deficit was halved, with a trade surplus recorded with non-EU countries (~GBP1.73 bln) for the first time in at least 20-years. UK goods exports rose 2.2%, while imports dropped a heady 11.6%.  

The euro approached its 200-day moving average just below $1.1140 before being sold in the European morning back toward $1.1110. There are two sets of expiring options that may serve to curtail the price action. There are 1.53 bln euros in options at $1.1095-$1.1100, and 1.6 bln euros in options struck between $1.1120 and $1.1130. Looking ahead to tomorrow, there are 2.9 bln euro options at $1.1100. Sterling has been sold below $1.30 on the economic news, extending its decline for the fifth consecutive session. Initial support is seen near the late December lows near $1.2900, and stronger support is seen near $1.28.   

America

The US weaponization of the dollar took a new turn, according to press accounts. In response to the Iraqi Prime Minister seeking to start talks about an orderly exit of US troops, American officials have threatened to deny Iraq access to central bank account that is used for a range of state functions, including revenue from oil sales. It makes one recall the start of the Eurodollar market, the offshore market for dollars. The Soviet Union saw the way the US threatened sterling during the Suez Crisis and moved its dollar deposits from US banks to London banks. The offshore banks did not face the interest rate caps the US domestic banks did. 

Some pushback, and argue, how can it be that weaponization of the dollar, which includes access to it, and the greenback remains the preeminent currency on nearly any metric one chooses? Yet it seems clear that friends and foes alike are looking for an alternative, though it most likely won't be an international digital asset that Carney discussed recently.  The move away from the dollar is hampered by the absence of a clear, compelling alternative. Still, US sanctions force countries, like Russia, to abandon the dollar in favor of gold and the yuan apparently, A decade ago Russia held about $175 bln worth of US Treasuries; today, less than $11 bln. China is the number one trade partner of many more countries than the US. It is creating incentives to trade in yuan. It seems to be politically naive to think that the US can wield a powerful stick and not prompt a reaction by those on the receiving end, and those, like Moscow, during the Suez Crisis, simply observing what could happen to them, Other functions of the dollar, such as in payment systems, can be challenged.  King Dollar is not about to be supplanted, but it could be supplemented. 

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Read more by Marc on his site Marc to Market.

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