- Pound continues to struggle as investors unwind bullish bets.
- Australian Dollar, Japanese Yen might offer clearest opportunities.
- Ultimately, tomorrow’s December CPI report will be pivotal.
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Intraday Price Perspective
A scan of this morning’s best and worst performers via the Strong/Weak app on the first full trading day after the weakest US labor market report since January 2011 shows that capital is returning to risk sensitive assets. In particular, the Japanese Yen is seeing a rebound amid softer US Treasury yields (weighing on the USDJPY), while the Australian and New Zealand Dollars are rallying sharply as the prospect of continued stimulus from the world’s leading central banks looks bright.
In light of last week’s data and the softening yield environment, the British Pound enters the coming period with a more uncertain future. Central to Sterling weakness has been budding expectations for a dovish shifting in the Bank of England’s forward guidance policy - the Unemployment Rate threshold would be lowered to 6.5% from 7.0%.
Ironically, this is a result of recent economic momentum, as it looks like the UK Unemployment Rate will hit 7.0% sometime in early-2014. The BoE is worried that higher rates resulting from a stronger economy will be self-defeating; right or wrong, it is attempting to front-run an accelerated tightening cycle.
Accordingly, because the BoE needs a soft price environment in order to justify a dovish shift in policy – the desire to keep rates low so as to not choke off growth - we are watching this Tuesday’s December UK Consumer Price Index release with great anticipation.
Confirmation that inflation remains pinned below the BoE’s +2.5% (y/y) forward guidance circuit may bethe signal for a dovish shift at the February meeting – and that may be setting up the GBPAUD and GBPJPY for technical corrections in the coming days.
--- Written by Christopher Vecchio, Currency Analyst
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