British Pound Volatility Ahead on Bank of England Minutes, Unemployment Data

Key Overnight Developments

• New Zealand Dollar Slips as Consumer Prices Fall Short of Expectations
• Australian Consumer Confidence Rose Most in Six Months, Says Westpac
• Japan’s Retail Service Demand Declines as Expected in November

Critical Levels



The Euro traded sharply lower, losing as much as 0.8% against the US Dollar as Asian markets priced in yesterday’s weaker-than-expected investor confidence reading. The move helped lead most major currencies lower against the greenback, with the British Pound trading down as much as -0.5%. We remain short EURUSD at 1.4881.

Asia Session Highlights



New Zealand’s Consumer Price Index revealed inflation fell -0.2% in the fourth quarter amid expectations for a flat result. However, the annual inflation rate rose to 2%, the highest in six months and only slightly below the 2.1% that economists predicted ahead of the release. Still, the outcome proved to weigh on the New Zealand Dollar, sparking a 45-pip drop after the figures printed as traders trimmed their RBNZ rate hike expectations for the year ahead.

Australian Consumer Confidence rose 5.6% in January to mark the biggest increase in six months according to a report from Westpac Banking Corp. Traders took the outcome to suggest that the level of private demand may be sufficient to support Australia’s economic recovery after stimulus is withdrawn, boosting expectations that the Reserve Bank of Australia will raise interest rates again in February. Indeed, a Credit Suisse gauge of the markets’ priced-in outlook rose 5 percentage points after the figures crossed the wires, showing traders now see a 74% chance of a 0.25% increase in benchmark borrowing costs at the next policy meeting.

Japan’s Tertiary Index tracking retail service demand declined in line with expectations, slipping -0.2% from the previous month in November. The outcome reinforces yesterday’s disappointing consumer confidence figures, hinting that the private sector will have a hard time supporting economic recovery in the absence of fiscal stimulus and robust overseas demand.


Euro Session: What to Expect



Minutes from the last policy meeting of the Bank of England headline the economic calendar in European hours, with traders looking for the report to offer some clarity amid conflicting cues about the direction of monetary policy this year. The rate announcement brought no changes to the status quo, reinforcing the widely held belief that the central bank will remain uncommitted until it completes and assess the impact of November’s £25 billion expansion of its quantitative easing program in February’s updated quarterly inflation report. However, last week’s comments from Andrew Sentence presented a clear challenge to this logic and sent the British Pound sharply higher as the BOE policymaker told The Guardian newspaper that interest rates may have to rise this year to curb inflation amid economic recovery. Yesterday’s higher-than-expected jump in consumer prices in December continued to feed bullish momentum, lending more credence to the idea that UK monetary policy would not be as loose as the market had even recently expected.

UK Jobless Claims are expected to fall for the second consecutive month in December while the Claimant Count (a proxy for the jobless rate) holds steady at 5% for the fourth time since September. This hints that labor market conditions may be starting to gradually bottom out, opening the door for sharp Sterling volatility, particularly if the data prints against a backdrop of anything but a clearly dovish Bank of England.

Turning to the Continent, German Producer Prices are expected to rise for the second month in December, with the annual pace of wholesale deflation easing to a six-month low of -5.1%. The data is unlikely to have much market-moving potential as its implications for near-term monetary policy are probably very limited considering the relatively dovish posture taken by the European Central Bank with last week’s interest rate announcement.

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