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Forex: British Pound Weighed By Slower Inflation, Bank Of Canada Holds Rate At 1.00%

By , Currency Analyst
12 April 2011 13:30 GMT

Talking Points

  • British Pound: Inflation Cools In March
  • Euro: ECB Sees Scope To Reestablish Exit Strategy
  • Canadian Dollar: BoC Holds Rate At 1.00%
  • U.S. Dollar: Weakens Against Most Counterparts

Easing price pressures in the U.K. dragged on the British Pound during the European trade, and the sterling may continue to retrace the advance from earlier this month as interest rate expectations falter. The GBP/USD slipped to 1.6226 as consumer prices in the U.K. slowed to an annualized 4.0% in March after expanding 4.4% in the previous month, while the core rate of inflation fell back to 3.2% from 3.4% in February. As the risk for inflation cools, it seems as though the Bank of England will maintain its current policy throughout the first-half of the year, and the central bank may look to support the real economy for most of 2011 as the ongoing slack within the private sector bears down on price growth.

In turn, there is a high probability that the BoE minutes will show another 6-3 split within the MPC, and central bank Governor Mervyn King may continue talk down speculation for higher borrowing costs as the central bank aims to encourage a sustainable recovery. According to Credit Suisse overnight index swaps, investors are now pricing the benchmark interest rate in the U.K. to increase by 50bp over the next 12-months, and the GBP/USD may trade within a broad range in the days ahead as investors weigh the prospects for future policy. However, as the DailyFX Speculative Sentiment currently stands at -1.39, the contrarian indicator suggests that the pound-dollar will continue to trend higher over the near-term, and the pair may hold steady throughout the week as the BoE is scheduled to release its policy statement on April 20.

The Euro pared the previous day’s decline as the European Central Bank pledged to normalize monetary policy further over the coming months, and the EUR/USD may continue to retrace the decline from all the way back in 2009 as interest rate expectations continue to support the single-currency. ECB board member Juergen Stark said the central bank will adjust the interest rate at an “appropriate pace” as the risk for inflation materialize, and went onto say that economic activity in the first-quarter may be ‘stronger than expected’ as the recovery gathers pace. As the Governing Council sees scope to reestablish its exit strategy over the coming months, the EUR/USD is likely to maintain the upward trend from earlier this year, and the bullish sentiment underlying the single-currency may gather pace going into the middle of the week as the exchange rate clears 1.4500 for the first time since January 2010.

Nevertheless, the Bank of Canada held the benchmark interest rate at 1.00% in April and pledged to carefully consider future rate hikes given the ‘material excess supply’ in the real economy, and sees the headline reading for inflation at the 2% target by the middle of 2012 as the central bank expect GDP to increase 2.9% this year amid an initial projection for a 2.4% expansion in the growth rate. Indeed, currency traders show a bearish reaction to the policy statement as the BoC continued to talk down speculation for higher borrowing costs, and the Canadian dollar may lose ground throughout the remainder of the week as interest rate expectations falter. Meanwhile, market participants shifted away from the greenback and flooded into the Swiss franc following the flight to safety, and the greenback may struggle to hold its ground throughout the North American trade as Fed officials maintain a cautious outlook for the region. NY Fed President William Dudley held a cautious look for the world’s largest economy as he expects unemployment to come down ‘slowly,’ and the dovish rhetoric held by the FOMC may continue to bear down on the greenback as the central bank continues to carry out the additional $600B in quantitative easing.

Will the EUR/USD Maintain The Upward Trend From Earlier This Year? Join us in the Forum

Related Articles: Weekly Currency Trading Forecast

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

FX Upcoming

Currency

GMT

EST

Release

Expected

Prior

USD

11:30

07:30

NFIB Small Business Optimism (MAR)

95.0

94.5

CAD

12:30

08:30

Intl Merchandise Trade (FEB)

0.5B

0.1B

CAD

12:30

08:30

New House Price Index (MoM) (FEB)

0.2%

0.2%

CAD

12:30

08:30

New Housing Price Index (YoY) (FEB)

2.0%

1.9%

USD

12:30

08:30

Import Price Index (YoY) (MAR)

8.6%

6.9%

USD

12:30

08:30

Trade Balance (FEB)

-$44.0B

-$46.3B

USD

12:30

08:30

Import Price Index (MoM) (MAR)

2.1%

1.4%

CAD

13:00

09:00

Bank of Canada Interest Rate Decision

1.00%

1.00%

USD

14:00

10:00

IBD/TIPP Economic Optimism (MAR)

45.0

43.0

USD

18:00

14:00

Monthly Budget Statement (MAR)

-$189.0B

-$222.5B

Currency

GMT

Release

Expected

Actual

Comments

GBP

23:00

BRC Sales (YoY) (MAR)

--

-3.5%

3rd contraction in last 4

GBP

23:00

RICS House Price Balance (MAR)

-24%

-23%

9th straight contraction

JPY

23:50

Bank Lending Banks Adjustments (YoY) (MAR)

--

-1.7%

13th straight contraction

JPY

23:50

Bank Lending Banks ex-Trust (MAR)

--

-1.8%

JPY

23:50

Money Stock M2+CD (YoY) (MAR)

2.5%

2.7%

Continues recent rising trend

JPY

23:50

Money Stock M3 (YoY) (MAR)

1.9%

2.0%

NZD

00:00

QV House Prices (Yoy) (MAR)

--

-2.0%

4th straight contraction

AUD

01:30

NAB Business Conditions (MAR)

--

9

Climbs after 2 contractions

AUD

01:30

NAB Business Confidence (MAR)

--

9

Falls sharply from 1yr high

JPY

06:00

Machine Tool Orders (YoY) (MAR P)

--

49.5%

Continues to slow after peaking in Jan.

EUR

06:00

German CPI (MoM) (MAR)

0.5%

0.5%

Climbs for 2nd month after contracting in Jan.

EUR

06:00

German CPI (YoY) (MAR)

2.1%

2.1%

Remains at multi-year highs

EUR

06:45

French Current Account (FEB)

--

-5.2B

Hits record low

GBP

08:30

CPI (MoM) (MAR)

4.4%

4.0%

Inflation eases for first time in 8-months as food prices decline sharply.

GBP

08:30

CPI (YoY) (MAR)

0.6%

0.3%

GBP

08:30

Core CPI (YoY) (MAR)

3.3%

3.2%

GBP

08:30

RPI (MAR)

232.8

232.5

GBP

08:30

RPI (MoM) (MAR)

0.6%

0.5%

GBP

08:30

RPI (YoY) (MAR)

5.5%

5.3%

GBP

08:30

DCLG House Prices (YoY) (FEB)

0.1%

0.7%

Climbs after declining sharply in Jan.

GBP

08:30

Visible Trade Balance (FEB)

-8000

-6776

Deficit continues to narrow

GBP

08:30

Total Trade Balance (FEB)

-3950

-2443

GBP

08:30

Trade Balance Non-EU (FEB)

-4900

-2849

EUR

09:00

German ZEW Survey (Econ Sentiment) (APR)

11.3

7.6

Declines sharply

EUR

09:00

German ZEW Survey (Current Situation) (APR)

85.2

87.1

Continues to climb

EUR

09:00

Euro-zone ZEW Survey (Econ Sentiment) (APR)

--

19.7

Drops sharply after climbing for 5 months

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12 April 2011 13:30 GMT