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British Pound Bulls Fear Weaker Inflation Statistics

By John Kicklight
15 April 2014 03:15 GMT

Talking Points:

  • Dollar Bounces Along with Yields, CPI a Key Benchmark
  • British Pound Bulls Fear Weaker Inflation Statistics
  • Euro Takes Another Hit as ECB’s Threats Pick Up Intensity

Dollar Bounces Along with Yields, CPI a Key Benchmark

US equities may have put up a decent rebound to open the week, but that wouldn’t stop the dollar from doing the same. The S&P 500 jumped 0.8 percent Monday while the Dow Jones Industrial Average (ticker = USDollar) climbed 0.1 percent itself. A simultaneous rise from the benchmark risk measure and a currency normally relegated to its liquidity status is not particularly surprising, however, as we have seen the greenback draw more of its bearings from yield forecasts than traditional sentiment tides as of late. As it happens, the two-year Treasury yield rose 3.4 percent to 0.367 percent on the same day to help put the fire out of the past two week’s tumble in FOMC speculation. If this bounce is to forge new progress, the upcoming CPI release will have to play its part. Evan a mid-2015 hike needs some nascent inflation pressure.

British Pound Bulls Fear Weaker Inflation Statistics

Like the dollar, the sterling faces a key inflation update in the upcoming session. Price readings from the consumer, retail, factory and housing sectors are all due at 8:30 GMT. In comparison to the US inflation data, though the UK data weighs in on a far more contentious interest rate backdrop. Where the market is trying to find a grounding for whether the Fed will be prompted to move on rates in the first or second half of 2015, the view seems pretty clear on the Bank of England. There is a significant expectation that the BoE will hike its benchmark lending rate for the first time by the opening three months of 2015. That would mark the most hawkish of the major central banks – with the exception of the RBNZ – and it is without doubt a key source of the sterling’s strength this past 9 months. Yet what is a boon can quickly turn into a burden. Given the hawkish consensus, the impact of a ‘disappointing’ CPI read could prove particularly heavy on the pound.

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Euro Takes Another Hit as ECB’s Threats Pick Up Intensity

European monetary policy makers are trying their best to strong arm the Euro lower without having to actually resort to monetary policy. EURUSD opened the week more than 40 pips lower than were it close Friday – the biggest weekend drop in 13 months – following remarks delivered by ECB President Draghi. Back on March 13, the central banker took the step to link the exchange rate to monetary policy by suggesting an expensive euro contributed to deflation. The remark kept EURUSD from hitting 1.4000, but the pair really turned a week later because of the Fed. With the recent charge back to 1.3900, Draghi felt he had to up his game. The central banker said “the strengthening of the exchange rate requires further monetary stimulus”. We’ve heard plenty of warnings that they could be provoked or it was only a matter of time that more stimulus is on the way, but this is as explicit as we’ve seen. The question is – does the market believe them?

Yen Crosses Sluggish to Rebound with Nikkei 225, Risk

Though Japanese equity markets were off to a slow start Monday, the Nikkei 225 futures were playing catch up to US and European shares by rising 0.6 percent through early trade Tuesday. The traditional barometer for speculative appetite was materially higher, but the move smacked of weak conviction. The same was true of the yen-funded carry trade. Most of the yen crosses ranged between a 0.2 percent gain or equivalent loss. Given the weight of major support on these pairs (like 101 for USDJPY), investors are more insistent on a fundamental driver for progress.

New Zealand Dollar: Steady Rate Hikes Needs Inflation Backing

In the monetary policy ranks, the New Zealand dollar is at the very upper end of the perception curve – and for good reason. The Reserve Bank of New Zealand (RBNZ) was the first developed world central bank to hike its rate at its last meeting; and the authority remains very vocal about its intentions to carry on with further tightening over the next two years. Yet, as loudly as the central bank’s threats are, policy is still dictated by data. And, nothing is more important to rate setting that inflation. That makes the upcoming 1Q CPI reading for New Zealand particularly important. It is difficult to ‘surprise’ to the upside, but bulls born from hawkish expectations could be seriously taken aback by soft data.

Chinese Yuan Hits Fresh 13-Month Low Heading into 1Q GDP Data

USDCNH jumped 0.2 percent Monday and is up for the fifth consecutive session in early Tuesday trade. The consistency in the run is perhaps less impressive than the market’s overall level. With this week’s sustained drive, the exchange rate cleared nearly a month’s worth of resistance around 6.2150-2200 and nowtrades at 13-month highs. A heavy run of event risk meanwhile has already started. This morning, the government reported new lending in March grew more than expect to 1.05 trillion yuan while foreign reserves hit a record $3.95 trillion. The immediate impact was moderate though as the market readied for Wednesday’s 1Q GDP release amid calls for more stimulus.

Emerging Market Currencies Slip Lead by Ruble’s Ukraine Troubles

A further deviation between the picture equities painted Monday and the broader assessment of ‘risk trends’ was the lackluster performance of the Emerging Market set. From the MSCI Emerging Market ETF, a 0.2 percent slip was backed by the third weakest hand in trading volume this year. Meanwhile, JPMorgan’s EM volatility index advanced for a fourth consecutive day to 8.4 percent (still substantially off the March peak 9.3 vols and 2014 high of 10.5 vols on January 30). Looking at the FX performance for the group, the vast majority of the EM currencies were moved lower Monday. Leading the way was the Russian Ruble’s 0.8 percent tumble as the US and Eurozone threatened further sanctions over Ukraine. US President Obama and Russian President Putin reportedly spoke on the country’s turmoil, but little progress was reported.

Gold Advances to Three-Week High After COT Shows Three-Week Drop in Speculative Holdings

Despite a rebound in equities (for risk trends) and a further bounce from the US dollar, spot gold still managed a 0.7 percent climb Monday to push the metal back to $1,328. Looking at the commodity’s performance against various currencies, it comes as little surprise that the biggest jump on the day was associated with the Euro. The threat of stimulus – regardless of the catalyst – will provide a material source of demand for a non-fiat asset. On a broader basis, the general drop in the majors’ benchmark yields (10-year government bond) to the cusp of an 8-month low further weakens the argument against holding a physical asset that suffers from a lack of traditional return. That said, the speculative demand that was the metal’s primary source of strength has significantly eroded as of last. The CFTC’s Commitment of Traders data shows that net long speculative holdings of gold futures have dropped an impressive 35 percent in just the past three weeks.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

4:00

JPY

Tokyo Condominium Sales (YoY) (MAR)

-24.1%

Since the expansion of the BoJ’s QE program in 2013, Japanese Business Confidence and Capital Spending have been have risen considerably, evident in the steady upward progression of the Japanese Machine Tool Orders Index

6:00

JPY

Machine Tool Orders (YoY) (MAR F)

41.8%

8:30

GBP

Consumer Price Index (MoM) (MAR)

0.2%

0.5%

Since late 2011, the UK’s CPI (YoY) has been in decline. In recent months, the index fell below the BoE’s current inflationary target of 2%. Survey expectations of a modest decline in prices are expected given the overarching trend of slowing inflation this past year. In line with such expectations, UK Housing prices have been on the rise and are expected to have increased through the month of February.

8:30

GBP

Consumer Price Index (YoY) (MAR)

1.6%

1.7%

8:30

GBP

Core Consumer Price Index (YoY) (MAR)

1.6%

1.7%

8:30

GBP

Producer Price Index – Output (YoY) (MAR)

0.3%

0.5%

8:30

GBP

Producer Price Index – Input (YoY) (MAR)

-6.1%

-5.7%

8:30

GBP

Retail Price Index (MoM) (MAR)

0.3%

0.6%

8:30

GBP

Retail Price Index (YoY) (MAR)

2.5%

2.7%

8:30

GBP

DCLG UK House Prices (YoY) (FEB)

7.4%

6.8%

9:00

EUR

German ZEW Survey (Current Situation) (APR)

51.8

51.3

Economic Sentiment in Germany and the broader Euro-Zone has suffered modest declines since the beginning of 2014. Concurrently, the euro has appreciated considerably over the past year (>6%). Should the Euro-Zone continue to demonstrate negative economic conditions and should the Euro continue to appreciate against other major currencies, be mindful of the possibility of further QE under ECB President Draghi.

9:00

EUR

German ZEW Survey (Economic Sentiment) (APR)

45.0

46.6

9:00

EUR

Euro-Zone ZEW Survey (Eco Sentiment) (APR)

61.5

9:00

EUR

Euro-Zone Trade Balance s.a. (euros) (FEB)

14.1B

9:00

EUR

Euro-Zone Trade Balance (euros) (FEB)

0.9B

12:30

USD

Empire Manufacturing (APR)

8.00

5.61

U.S. Inflation Indexes are expected to continue to advance towards the Fed’s inflation target of 2.0% stoking expectations of further depreciation of the US Dollar.

12:30

USD

Consumer Price Index (MoM) (MAR)

0.1%

0.1%

12:30

USD

Consumer Price Index (YoY) (MAR)

1.4%

1.1%

12:30

USD

CPI ex Food & Energy (MoM) (MAR)

0.1%

0.1%

12:30

USD

CPI ex Food & Energy (YoY) (MAR)

1.6%

1.6%

12:30

USD

Consumer Price Index Core Index s.a. (MAR)

236.122

12:30

CAD

Manufacturing Shipments (MoM) (FEB)

1.0%

1.5%

Canadian Manufacturing Sales continue to oscillate around historical average.

13:00

CAD

Existing Home Sales (MoM) (MAR)

0.3%

13:00

USD

Net Long-term TIC Flows (FEB)

$7.3B

Capital Inflows into the US have continued to trend upwards through 2014 after a sharp decline late last November.

13:00

USD

Total Net TIC Flows (FEB)

$83.0B

14:00

USD

NAHB Housing Market Index (APR)

50

47

22:45

NZD

Consumer Prices Index (QoQ) (1Q)

0.5%

0.1%

The RBNZ has a target inflation of 2-3% but has already engaged its first rate hike and has threatened more.

22:45

NZD

Consumer Prices Index (YoY) (1Q)

1.7%

1.6%

GMT

Currency

Upcoming Events & Speeches

1:30

AUD

Reserve Bank of Australia Meeting Minutes

12:30

USD

Fed's Dennis Lockhart Speaks on Financial Markets

12:45

USD

Fed Chair Janet Yellen Speaks on Financial Stability

19:00

USD

Fed's Charles Plosser Speaks on Financial Stability

20:00

USD

Fed's Eric Rosengren Speaks on U.S. Economy

20:30

USD

API Weekly Statistical Bulletin

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

13.5800

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.1500

2.3000

11.8750

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.0238

2.1207

10.5222

7.7540

1.2535

Spot

6.5614

5.4033

5.9632

Support 1

12.9650

2.0700

10.2500

7.7490

1.2000

Support 1

6.0800

5.3350

5.7450

Support 2

12.6000

1.7500

9.3700

7.7450

1.1800

Support 2

5.8085

5.2715

5.5655

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\CCY

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

Gold

Res 3

1.3909

1.6826

102.70

0.8865

1.1042

0.9496

0.8770

142.07

1347.18

Res 2

1.3886

1.6801

102.49

0.8848

1.1023

0.9476

0.8750

141.74

1341.86

Res 1

1.3864

1.6777

102.28

0.8832

1.1004

0.9456

0.8730

141.41

1336.54

Spot

1.3819

1.6728

101.86

0.8800

1.0966

0.9416

0.8689

140.76

1325.89

Supp 1

1.3774

1.6679

101.44

0.8768

1.0928

0.9376

0.8648

140.11

1315.24

Supp 2

1.3752

1.6655

101.23

0.8752

1.0909

0.9356

0.8628

139.78

1309.92

Supp 3

1.3729

1.6630

101.02

0.8735

1.0890

0.9336

0.8608

139.45

1304.60

v

--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

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15 April 2014 03:15 GMT