Euro Market Open

British Pound in Play with Inflation to Reverse From Record High (Euro Open)

Tuesday, 18 November 2008 04:44:29 GMT  |  Ilya Spivak, Currency Analyst

The British Pound takes center stage in European trading with the UK Consumer Price Index headlining the economic calendar. Expectations call for the annual inflation rate to fall to 4.8% having been the highest in over 16 years last month, opening the door for more interest rate cuts from the Bank of England.

Key Overnight Developments

• Australian Dollar Unmoved as RBA Signals Rate Cuts Nearly Over
• Euro, Pound Retreat from NY Session Highs Against the US Dollar


Critical Levels



Euro selling carried over into overnight trading from the New York session, with EURUSD slipping below 1.2650 to find support at the key 1.2600 level. The British Pound also pulled back from daily highs, but the correction was seemed more muted. Prices found a floor above resistance-turned-support at 1.4950 and settled into a narrow range ahead of the European markets open.


Asia Session Highlights



The text of the minutes from last meeting of the Reserve Bank of Australia unexpectedly suggested the central bank may be nearing the end of its campaign of monetary easing. Glenn Stevens and company slashed rates by a whopping 2% since early September to bolster the sagging economy. It seems the magnitude of recent easing was designed to quickly offer the necessary stimulus without extending rate cut expectations too far into the coming year. The reasoning behind this seems to be the inflationary effect of the sharp depreciation in the Australian dollar. Entrenched rate cut expectations would put continued pressure on the Aussie, making it harder for the bank to strike the right balance between boosting growth and bringing inflation back within the 2-3% target range. This looks to have moved the RBA to favor a “big bang” rather than a gradual approach to monetary stimulus, with the minutes stating that “given the balance of risks, there was an advantage in moving the setting of monetary policy quickly to a neutral position.'' On balance, the Australian dollar did not derive immediate strength from the announcement with overnight index swaps still pricing in a 75-100 basis point rate cut at the RBA’s next meeting on December 2nd.


Euro Session: What to Expect




Britain’s Consumer Price Index is expected to show the pace of price growth slowed to 0.1% in October, brining the annual inflation rate down to 4.8% having peaked at 5.2% in the preceding period, the highest in over 16 years. The Bank of England had moved forward with aggressive interest cuts before headline inflation reversed course, aiming to help restore confidence in shaky financial markets by slashing borrowing costs by a full 2% in the course of just a single month. The European Commission forecasts that inflation will slow to just 1.9% in 2009 from a cumulative 3.7% by the end of this year as a sluggish economy and falling commodities put the brakes on price growth. Mervyn King and company are expected to offer substantially more monetary stimulus in the near term, the overnight index swaps pricing in at least a 0.50% rate cut at the BOE’s next policy meeting and 100 basis points in total easing over the next 12 months.

Switzerland’s Retail Sales are expected to rebound a bit, adding 0.8% in the year to September having ground to a halt in the preceding period. Still, it would be premature to call this a come-back: consumer confidence sank to the lowest level in 5 years in the three months to October, suggesting more weakness lies ahead. The Swiss National Bank unexpectedly cut benchmark borrowing costs by 0.50% in concert with the BOE and ECB earlier this month, warning that deterioration in the global economic outlook will adversely affect the mountain nation such that “growth in 2009 might even be negative.” Although bond yield forecasts and overnight index swaps point to inaction from the SNB at least until 2010, another surprise cut (likely as part of a coordinated European effort) cannot be ruled out.


To contact Ilya regarding this or other articles he has authored, please email him at ispivak at dailyfx dot com.

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