The Pound shot up nearly 80 bps after the U.K. CPI report showed that inflation unexpectedly rose to 3.2% from 3.0%, putting it back above the central bank’s 1-3% target band. The rise in consumer prices was led by a 2.4% increase in household goods, followed by a 1.7% rise in food prices.
Talking Points
• Japanese Yen: Consolidating Above 98.00
• Pound: CPI Unexpectedly Rises
• Euro: PMI Improves Slightly
• US Dollar: Richmond Fed On Tap
Pound Pares Gains After BoE King Says Downside Risks Remain For Inflation
The Pound shot up nearly 80 bps after the U.K. CPI report showed that inflation unexpectedly rose to 3.2% from 3.0%, putting it back above the central bank’s 1-3% target band. The rise in consumer prices was led by a 2.4% increase in household goods, followed by a 1.7% rise in food prices. Additionally, core prices which remove volatile energy costs increased to 1.6% from 1.3%, signaling that broader prices may be stabilizing. The rise above the upper band of the target range will now require Governor Mervyn King to write a letter of explanation to the government stating the causes of the increasing price pressures.
However, BoE governor King dismissed the surprising results attributing them to the decline in the Pound and recommitted to the central bank’s projections that the inflation will eventually undershoot their target band. The central bank leader would go onto to say that future quantitative easing decisions will be “anchored” by inflation and that it will guide its exit strategy. He would also state the challenge for the bank is to raise the savings rate and that QE measures may take up to six months to have an impact. Sterling has given back some of its gains on the comments. Nevertheless, the GBP/USD broke above the 100-Day SMA for the first time since August, 2008 which is a clear bullish sign.
The Euro would reach as high as 1.3680 during overnight trading before giving back some of its gains as risk appetite started to fade. The EUR/USD would reach as low as 1.3575 before finding support on the back of an improvement in Euro-Zone PMI . The flash reading showed a slight improvement to 37.6 from a record low 36.2 led by an improvement in services to 40.1 from 39.2 in February. Regardless the region remains in a contraction and pressure will remain on the ECB to take further action. The Euro failed to eclipse yesterday’s intraday high of 1.3778 and the level may now turn into a form of resistance. We could see Euro weakness resume if risk appetite continues to wane.
A relatively empty economic calendar will leave price action at the mercy of risk sentiment today which could see continued dollar weakness if equity markets build upon yesterday’s gains. Due to cross the wires today is the January house price index which is forecasted to show a 0.9% decline in values that may be overlooked after yesterday’s unexpected improvement in existing home sales. The Richmond Fed manufacturing release may have the most market moving potential as further deterioration in activity may increase expectations for further job losses. However, economists are expecting a flat reading which may make it a non-event. The ABC sentiment reading is also on tap and will give some insight into future domestic growth. However, after yesterday’s rally we could see some profit taking today which could lead to the greenback recovering some of its losses. Indeed, we are seeing European markets mixed today and U.S. futures pointing toward a lower open. Fed chairman Ben Bernanke and U.S Treasury Secretary Tom Geithner will testify today regarding the AIG debacle, which could have an impact on markets.
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Forex Trading Weekly Forecast - 03.23.09
To discuss this report contact John Rivera Currency Analyst: jrivera@fxcm.com
