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FOREX: Pound May Rise if Inflation Overshoots Forecast on Oil Prices

By , Currency Strategist
20 March 2012 07:22 GMT

Talking Points

  • Pound May See Boost if Energy Costs Produce Upside CPI Surprise
  • Bernanke in Focus as Oil Gains Rekindle Fed Stimulus Speculation
  • Australian, NZ Dollars Slump as China Increases Fuel Prices Again

UK Consumer Price Index figures headline the calendar in European hours. Expectations call for the headline yearly inflation rate to decline to 3.3 percent in February, marking the fifth consecutive decline and the lowest reading since November 2010. A print in line with expectations is unlikely to materially change the outlook for Bank of England policy and so ought to have relatively limited implications for the British Pound.

With that in mind, an unexpected boost from oil prices that has appeared in a number of other country’s CPI readings creates the possibility for an upside surprise. Indeed, UK benchmark Brent crude prices jumped 10 percent in February, marking the largest increase since May 2009. Such an outcome may weigh on additional QE expectations and so could offer Sterling some support.

Later in the day, the spotlight will turn to Fed Chairman Ben Bernanke as he delivers the first in four lectures at George Washington University. The exercise is part of the central bank’s recent push for transparency, with Mr Bernanke expected to lean heavily on clarifying the steps the Fed took during and in the immediate aftermath of the 2008 global credit crunch and subsequent recession. Although not a regular policy speech at face value, the outing allows for ample opportunity for the Chairman to touch on the outlook for policy going forward.

As we discussed yesterday vis-à-vis commentary from NY Fed President Dudley, dovish commentary in light of emerging worries about oil’s ability to derail the US recovery, replaying what happened in late 2010 – early 2011, is likely to weigh on the US Dollar. Alternatively, a neutral outcome echoing this month’s FOMC statement that acknowledges the run-up in oil prices but doesn’t hint at policymakers’ readiness to provide near-term support is likely to have the opposite effect.US Housing Starts and Building Permits data are also on tap, with narrow improvements expected on both fronts.

The greenback rose against its leading counterparts in overnight trade as Asian stocks declined, reigniting safe-haven demand for the benchmark currency. Regional bourses fell after China raised fuel prices, tacking on 7 percent to the price of gasoline and 7.8 percent to that of diesel after last week’s sharp run-up in crude oil. This marked the second such move from the administration in Beijing in less than six weeks and stoked fears that higher energy costs will further slow the world’s second-largest economy after it set its 2012 growth target at the lowest since 2004 two weeks ago.

The growth-linked Australian and New Zealand Dollars saw outsized losses, down as much as 0.6 and 0.5 percent against their US namesake, respectively. The Aussie gained briefly following the release of minutes from this month’s RBA policy meeting but support was quick to evaporate. Although the bank judged that downside risks to growth were now “somewhat less likely” to materialize and predicted inflation would stay on target over the medium term – weighing against near-term rate cut prospects – the statement offered little new information that didn’t already appear in the policy statement earlier this month.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

23:00

AUD

Conference Board Leading Index (JAN)

1.1%

-

-0.3% (R-)

0:30

AUD

RBA March Meeting Minutes

-

-

-

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

7:00

EUR

German Producer Prices (MoM) (FEB)

0.5%

0.6%

Low

7:00

EUR

German Producer Prices (YoY) (FEB)

3.2%

3.4%

Low

8:15

CHF

Industrial Production (QoQ) (4Q)

2.6%

-1.4%

Low

8:15

CHF

Industrial Production (YoY) (4Q)

-2.0%

-1.4%

Low

9:30

GBP

Consumer Price Index (MoM) (FEB)

0.4%

-0.5%

High

9:30

GBP

Consumer Price Index (YoY) (FEB)

3.3%

3.6%

High

9:30

GBP

Consumer Price Index - Core (YoY) (FEB)

2.3%

2.6%

Medium

9:30

GBP

Retail Price Index (FEB)

239.4

238

Low

9:30

GBP

Retail Price Index (MoM) (FEB)

0.6%

-0.6%

Low

9:30

GBP

Retail Price Index (YoY) (FEB)

3.5%

3.9%

Low

9:30

GBP

RPI Ex Mort Int. Payments (YoY) (FEB)

3.6%

4.0%

Low

11:00

GBP

CBI Trends Total Orders (MAR)

-5

-3

Low

11:00

GBP

CBI Trends Selling Prices (MAR)

13

10

Low

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.3165

1.3289

GBPUSD

1.5834

1.5933

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

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20 March 2012 07:22 GMT