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Forex: British Pound Leads Majors After Inflation Data

By , Currency Strategist
13 November 2012 12:05 GMT

ASIA/EUROPE FOREX NEWS WRAP

The volatile supply-demand relationship that governs investors’ appetite for risky assets is at a stand still for a second consecutive day on Tuesday, as investors continue to clamor for safety amid renewed concerns out of Greece, all while the US fiscal cliff has come into focus following last week’s US Presidential Elections. S&P 500 futures are barely pointing lower, and a mid-morning rally by the European currencies has begun what could be an intraday reversal ahead of the US session.

With some commentary on Greece coming from German Finance Minister Wolfgang Schaueble, there’s been very little of significance across the wires elsewhere this morning. Instead, the focus has been on data out of the United Kingdom, which has propelled the British Pound to the top performer today.

The Consumer Price Index for October showed yearly inflation of +2.7% versus +2.4% expected, easily missing the consensus forecast provided by Bloomberg News. But this print best illustrates a recent problem for Bank of England policymakers, especially since the 2007-2008 financial crisis: an inability to accurately diagnose inflation problems. UK Gilts yields rose following the release, boosting the prospective return on the British Pound, thus allowing it to appreciate to the top spot on the day.

The British economy is weak, but has shown signs of improvement in recent months, with the third quarter growth reading beating expectations handily last month (as I noted then, this appears to be a one-off event given bank holidays and the London Olympics). If the uptick in inflation is demand-pull in nature (the good kind: higher rates of employment boost consumption, which force sellers to raise prices to keep supply-demand relationship at equilibrium), then today’ October CPI release looks constructive.

Taking a look at credit, weakness in peripheral bonds may be holding back the Euro on Tuesday. The Italian 2-year note yield has increased to 2.355% (+0.8-bps) while the Spanish 2-year note yield has increased to 3.202 % (+5.3-bps). Similarly, the Italian 10-year note yield has increased to 5.108% (+0.6-bps) while the Spanish 10-year note yield has increased to 5.909% (+4.6-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 11:35 GMT

GBP: +0.16%

CHF:+0.03%

EUR:-0.01%

JPY:-0.10%

NZD: -0.11%

AUD:-0.14%

CAD: -0.15%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.11% (0.00% past 5-days)

ECONOMIC CALENDAR

Forex_British_Pound_Leads_Majors_After_Inflation_Data_fx_news_technical_analysis_body_Picture_7.png, Forex: British Pound Leads Majors After Inflation Data

See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

TECHNICAL ANALYSIS OUTLOOK

Forex_British_Pound_Leads_Majors_After_Inflation_Data_fx_news_technical_analysis_body_Picture_6.png, Forex: British Pound Leads Majors After Inflation Data

EURUSD: A new November low was set today although a Hammer may be forming on the daily chart, ahead of a daily RSI oversold reading, suggesting that the market may be searching for a near-term bottom; a daily Hammer is considered a reversal signal. Price action remains biased to the downside as the EURUSD has struggled to regain 1.2750, mid-June swing highs and the early-September “pause” the EURUSD experienced. Support comes in at 1.2630/45 (100-DMA) and 1.2400/35. Resistance is 1.2750, 1.2820/30 (mid-October swing low, 200-DMA), 1.2880/1.2900, and 1.3015/20 (late-October high).

Forex_British_Pound_Leads_Majors_After_Inflation_Data_fx_news_technical_analysis_body_Picture_5.png, Forex: British Pound Leads Majors After Inflation Data

USDJPY: No change from yesterday: “Gold and the USDJPY are signaling that the fiscal cliff concerns are coming back into the picture, with the USDJPY back to its lowest level in a month and Gold back to its highest price over the same time frame. Friday’s Doji/Hammer suggests a pause in the downtrend from key resistance in the 80.50/70 zone (mid-June swing high), although the uptrend from mid-September remains broken. Support is 79.10/30 and 78.60. Resistance is at 79.55/65 (20-EMA, 200-DMA), 80.00, 80.50/70, and 81.75/80 (mid-April swing high).”

Forex_British_Pound_Leads_Majors_After_Inflation_Data_fx_news_technical_analysis_body_Picture_4.png, Forex: British Pound Leads Majors After Inflation Data

GBPUSD: No change from last Tuesday: “While the GBPUSD appeared to be moving to breakout of its recent downtrend, an Inverted Hammer on November 1 has biased the pair to the downside. For now, we are neutral if not looking lower.” Resistance comes in at 1.5910/15 (October low), 1.6005/15 (20-EMA, 50-EMA) and 1.6170/80 (late-October highs). Support is 1.5845/66 (100-DMA, 200-DMA) and 1.5800/05.

Forex_British_Pound_Leads_Majors_After_Inflation_Data_fx_news_technical_analysis_body_Picture_3.png, Forex: British Pound Leads Majors After Inflation Data

AUDUSD: No change from yesterday: “The pair has rebounded ahead of a confluence of support, and is now back into a key resistance zone that has been of interest for traders numerous times over the past four months. Support is close by at 1.0330/50 (20-EMA, 50-EMA, 100-DMA, 200-DMA) and 1.0310/05 (ascending trendline off of June 1 and October 23 lows). Resistance is at 1.0405/50 (former swing highs and lows, October high) and 1.0500/15.”

Forex_British_Pound_Leads_Majors_After_Inflation_Data_fx_news_technical_analysis_body_Picture_2.png, Forex: British Pound Leads Majors After Inflation Data

S&P 500: No change from yesterday: “Now the pullback is looking deeper: the ascending channel off of the October 4, 2011 and June 4, 2012 lows is breaking. Targets near 1355 are in focus now that price is below 1395. Support comes in at 1375 and 1350/55 (monthly S2, ascending channel support off of November 2011 and June 2012 lows). Resistance comes in at 1383 (200-DMA),1405 (100-DMA), and 1415/20 (20-EMA, 50-EMA). The Doji on Friday’s chart after an extended move lower, right ahead of support, suggests that some sideways if not bullish price action is possible over the coming days. I’m looking for a low.”

Forex_British_Pound_Leads_Majors_After_Inflation_Data_fx_news_technical_analysis_body_Picture_1.png, Forex: British Pound Leads Majors After Inflation Data

GOLD: No change from yesterday: “Gold has rebounded to fresh November highs and remains above 1715; my bias is thus becoming increasingly bullish. I still expect the 1700 area to be defended vigorously, and look to get long as low as 1680. Resistance is 1735 (here now), 1755/58 and 1785/1805. Support is 1700, 1675/80 (100-DMA, November low), and 1660/65 (200-DMA).”

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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13 November 2012 12:05 GMT