daily brief

Pound Rises On Higher Inflation Expectations, Commodity Dollars Soaring On Increased Chinese Investment

Thursday, 11 June 2009 10:05:01 GMT  |  John Rivera, Currency Analyst

The sterling continued to find support overnight reaching as high as 1.6490 after a BoE survey showed that consumer expectations for inflation rose to 2.4% from 2.1% for the next 12 months. Additionally, the NIESR GDP estimate showed that the rate of contraction for the economy has slowed in the three months ending in May to -0.9% from -1.5% in the period ending in April.

Talking Points
•    New Zealand Dollar: Higher on RBNZ Rate Hold And Increase In Chinese Investment
•    Pound: Rising Inflation Expectations Spur Support
•    Euro: Choppy As ECB Offers Nothing New
•    US Dollar: Retail Sales On Tap

Pound Rises On Higher Inflation Expectations, Commodity Dollars Soaring On Increased Chinese Investment

The sterling continued to find support overnight reaching as high as 1.6490 after a BoE survey showed that consumer expectations for inflation rose to 2.4% from 2.1% for the next 12 months. Additionally, the NIESR GDP estimate showed that the rate of contraction for the economy has slowed in the three months ending in May to -0.9% from -1.5% in the period ending in April. The stabilizing economy and rising commodity prices have fueled expectations for rising costs and ultimately higher interest rates from the central bank.

The major central banks expressed when they embarked on their monetary easing policies, that the risk of future inflation would leave them ready to reverse their actions and look to remove liquidity from the markets. Policy makers are concerned that the risks of future bubbles exist, if they don’t manage the process in a timely manner. Therefore, we are starting to see interest rate expectations rise in the U.S. and U.K. as evidence mounts that growth is around the corner. Therefore, rhetoric from policy makers will start to have a greater impact on price action and bears watching as we go forward. Yet, we don’t expect any change in policy until we start to see concrete signs of growth which may not come until early 2010. It appears that we may see a test of the 6/3 high of 1.6665 for the GBP/USD today with potential to 1.7000 beyond that price level.

The Euro has remained choppy through overnight trading and the ECB’s monthly bulletin didn’t help generate any conviction for either direction. The Central Bank said the Euro-zone economy will start growing again by the middle of next year and inflation will pick up after temporarily dipping into negative territory this summer, which was nothing that they haven’t already stated.  Meanwhile, French non-farm payrolls showed further deterioration in the labor market as its initial reading for the first quarter was revised lower to -1.2% from -0.9%. The weak labor data only supports the arguments that growth will not return to the area until next year. Forex traders should watch the head and shoulders formation that is becoming evident which could signal that euro weakness is ahead. If we see a move below the 20-Day SMA at 1.3952, then a bearish bias may be warranted. 

Commodity dollars continue to generate support with the “kiwi” and Australian dollars the leaders on the day. A RBNZ rate hold and Australian employment figures reporting a loss of 1,700 jobs versus expectations of -30,000 has helped raise the outlook for the individual economies. However, it was evidence that Chinese capital investment is surging as the country’s 4 trillion Yuan stimulus plan start to impact its domestic economy that has raised the outlook for the global economy and demand for natural resources.

The dollar has given back its recent gains against most the major currencies as improving fundamentals across the globe has spurred hope that the broader economy has stabilized. The upcoming advance U.S. retail sales report is expected to keep the theme going as consumption is forecasted to rise by 0.5% in May. The U.S. consumer confidence indicator jumped the most in six years to 54.9 from 40.8 last month as rising equity markets and stabilizing house prices have eased fears which should support an increase in demand. Markets will be looking to see what the reaction will be from the greenback on the positive fundamental data. Will we see a bullish reaction similar to the Non-farm payroll report or will it send the dollar lower as it increases risk appetite. Additionally, initial jobless claims are forecasted to fall to 615,000 from 621,000 but a sharper drop would reinforce the U.S. labor report and could add to rising optimism. An auction of 30 year U.S. treasury bonds may add support for the dollar today and should be factored into strategies for today. Concerns are rising that increasing yields could start to derail the potential recovery.

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To discuss this report contact John Rivera Currency Analyst: jrivera@fxcm.com


 

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