British Pound Extends Decline as U.K. CPI Disappoints, Euro Pares Previous Day’s Advance

Talking Points
•    Japanese Yen: Mixed Amongst the Majors
•    Pound: U.K. CPI Weakens More-Than-Expected
•    Euro: ECB President Trichet Seeks Support for Greece
•    U.S. Dollar: Existing Home Sales, Home Price Index on Tap

British Pound Extends Decline as U.K. CPI Disappoints, Euro Pares Previous Day’s Advance

Nevertheless, Chancellor of the Exchequer Alistair Darling is scheduled to unveil the 2011 budget report tomorrow at 12:30 GMT, and the exchange rate could face increased volatility during his address as policy makers continue to see a risk for a protracted recovery, given the ongoing slack within the real economy.

Consumer prices in the U.K. increased 0.4% in February, which fell short of expectations for a 0.5% rise, while the headline reading for inflation slipped to 3.0% from 3.5% in the previous month to exceed forecasts for a drop to 3.1%. At the same time, the core CPI unexpectedly weakened to an annualized pace of 2.9% from 3.1% in January, and weakening price pressures could lead the Bank of England to maintain a dovish policy stance going into the second-half of the year as the central bank aims to encourage a sustainable recovery. Nevertheless, a report by the British Bankers Association showed loans for home purchases increased to 35.3K during the same period from a revised 35.2K in the previous month, which was just shy of forecasts for a rise to 36.5K, while the Hometrack Housing survey showed prices increased 0.3% for the second consecutive month in March. Nevertheless, the Confederation of British Industry’s distributive trades report showed the gauge for reported sales slipped to 13 in March from 23 in the previous month, with the sales orders index falling to 7 from 12 in February, and households may keep a lid on spending throughout the first-half of the year as they face a weakening labor market paired with tightening credit conditions.

The Euro pared the previous day’s advance and slipped to a low of 1.3502 during the overnight trade, and the single-currency may continue to test the upper and lower bounds of its narrow range as the European Union is scheduled to meet later this week. Meanwhile, European Central Bank President Jean-Claude Trichet said that the economies operating under the fixed-exchange rate system must assume “its full responsibility” to help Greece during a speech on Germany’s ZDF television, but went onto say that “there must be no negligence in the application of euro-region rules.” At the same time, the Bank of Finland said that the single-currency  has been “impacted by the risks related to growing indebtedness and debt management among euro area countries, especially Greece,” and argued that the “markets have considered the problems by individual member states as a de facto test for the single currency” as the “uncertainties over the speed of economic growth and worries over growing debt by states increased demand for safe haven currencies and support the external value of the Japanese yen and the U.S. dollar.”

The reserve currency rallied across the board, with the USD/JPY advancing to a high of 90.45, and the dollar may continue to appreciate at its benefits from safe-haven flows. Meanwhile, the economic docket is expected to show existing home contract 1.1% in February to an annualized pace of 5.00M from 5.05M in the previous month, while the home price index is forecasted to weaken another 0.8% in January following the 1.6% drop in the previous month. At the same time, the Richmond Fed manufacturing index is projected to increase to 5 in March from 2 in the month prior as businesses continue to ramp up their rate of production, but a dismal reading could reinforce a weakened outlook for the world’s largest economy as policy makers continue to see a risk for a “nascent” recovery.


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Forex Weekly Trading Forecast - 03.22.10

To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com