The Pound traded to as low as 1.4960 after reaching a high of 1.5092, as U.K. consumer prices unexpectedly declined 0.2% in October. The drop in inflation on the back of falling oil prices would see the annualized rate fall to 4.5% from 5.2%.
Talking Points • Japanese Yen: Finds Support At 96.20 • Swiss Franc: Retail Sales Unexpectedly Rise • Pound: Inflation Drops Most In Eleven Years • Euro: Remains Range Bound • US Dollar: Producer Prices on Tap Pound Trades Heavy As Inflation Drops the Most in 11 Years The Pound traded to as low as 1.4960 after reaching a high of 1.5092, as U.K. consumer prices unexpectedly declined 0.2% in October. The drop in inflation on the back of falling oil prices would see the annualized rate fall to 4.5% from 5.2%, which was the biggest drop in eleven years. The relieving of price pressures is expected to clear the way for more easing from the BoE. The drop in inflation wasn’t a significant surprise since oil prices have declined 60% from their all-time high. Additionally, the BoE in its last quarterly inflation report signaled that prices would ultimately drop below its 2% target in the next two years leading to deflation concerns. Therefore, we didn’t see a bigger sell off in the Sterling as traders were little fazed by the data and have since pushed the pair back above 1.5000. The Pound has continued to find trend line support which may keep it range bound until forex traders can get a better grasp on the ultimate impact of the credit crisis on the various economies. Nevertheless, the central bank is expected to cut rates by another 110 bps points in the next twelve months according to Credit Suisse overnight index swaps which will continue to be weighing factor for the Pound in the medium term. The Euro saw choppy trading during the overnight session with no fundamental releases to guide its direction. The EUR/USD traded in a tight range between 1.2550-1.2650 which could be an indicator that it is close to breaking out. The Euro continues to be on the other side of the risk trade and if declining equity markets in Asia and Europe are any sign then we may see it weaken as we enter the U.S. session. The longer term outlook for the pair remains to the downside as the ECB is expected to have to play catch up to the Fed in its easing interest rate policy. Meanwhile, Swiss retail sales unexpectedly rose 6.4% which was surprisingly led by discretionary spending, which could be a sign that consumer confidence may be on the rise on the back of the global efforts to stem the financial crisis. The U.S. is expected to experience the same drop in price pressures that we saw in the U.K. as producer prices are expected to have dropped 1.8% in October with the annualized rate slipping to 6.2% from 8.7%. The declining factory gate prices will ultimately filter through to consumer prices and provide Americans with extra spending money that may act as a stimulus for domestic growth. Today we will also see U.S. Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke speak to the House of Representatives about the TARP and its intended uses. Expectations are that in addition to reiterating the change in focus to back stopping consumer credit markets the Treasury Secretary will outline the future course of actions which includes leaving a significant portion of the funds to the incoming administration. The market reaction to this testimony will depend on its confidence in the new administration to take the correct measures. Additionally, Detroit automakers will take their pleas for help to Capitol Hill today as they continue to seek $25 billion in loans to help them meet their liquidity needs. The troubles of the big three have weighed on equity markets and risk appetite which will continue to be a supporting factor for the dollar today. Indeed, Net long-term TIC flows for September will cross the wires today and is expected to show that foreign investment in the U.S. jumped $27.2 billion from $14.0 billion the month prior. Considering this was before the evidence that the European and Asian economies have followed the U.S. into a recession, we may se this trend continue for the foreseeable future adding to the bullish dollar case. Will The EUR/USD Fall to 1.2000? Join us in EURUSD Forum Related Articles: U.K. Inflation Falls the Most in 11 Years, Fueling Concern for Deflation US Dollar Remains Inversely Linked to Stocks, But Correlations Don't Hold Forever... To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com