Talking Points:

- Inflation out of the U.K. came-out at 2.3% annualized versus an expectation of 2.1% and a prior read of 1.8%. This is a big jump in inflation – but the bigger question is will the BoE respond? We looked at what appears to be the initial stages of a shift within the bank in this week’s trading forecast.

- The U.S. Dollar continues to be weak despite more Fed-speak indicating that we might be seeing as many as three rate hikes this year (from Charlie Evans, yesterday). Today brings three more Fed speakers to the fray, and Thursday has the big one, when Fed Chair Janet Yellen delivers comments.

- If you’re looking for trading ideas, check out our Trading Guides. And if you’re looking for ideas that are more short-term in nature, please check out our Speculative Sentiment Index (SSI) Indicator.

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UK Inflation Beats

We’ve been discussing the prospect of higher rates of inflation in the U.K. for some time now; and slowly but surely that inflation reading has continued to increase. After the ‘flash crash’ in the currency in early-October, the prospect of rising inflation became rather mathematical – and we warned of this by Mr. Mark Carney months-ahead of the Brexit vote when he said a ‘sharp repricing’ in the value of GBP could lead to higher rates of inflation. But just after the referendum, this fear didn’t seem to play a large role at the BoE as the bank went on a bond-buying binge when launching their ‘bazooka’ of stimulus in August of last year.

But this only served to weaken the Pound even more; thereby increasing the potential for higher rates of inflation down-the-road. And as signs of inflation were moving-higher, the BoE was, at least initially, un-moved as they claimed a rather high tolerance for an ‘inflation overshoot’. And then at the bank’s Super Thursday in February, they actually decreased inflation expectations while increasing growth expectations for 2017 by a full 42%.

This morning we got another data point for U.K. inflation and the number printed well-above expectations at 2.3%. This is a hearty improvement from January’s read of 1.8%; and in response the British Pound has jumped-higher. This has sent GBP/USD above a key resistance area on the chart that we had looked at yesterday:

UK Inflation, Fed-Speak and French Elections as Price Action Drivers

Chart prepared by James Stanley

The longer-term setup in Cable is still very range-bound; and this recent iteration of strength has helped to fill-in the next phase of that range. For those looking at trend-continuation strategies for longer-term plays in Cable, awaiting a break of resistance levels at 1.2552 and 1.2685 could make that strategy considerably more attractive.

UK Inflation, Fed-Speak and French Elections as Price Action Drivers

Chart prepared by James Stanley

Fed-Speak on the Docket

We’re still within the first rounds of Federal Reserve commentary after last week’s rate hike, and today brings three more Fed speakers to the fray with Esther George at Noon (ET), Loretta Mester at 6:00 PM ET and Eric Rosengren of the Boston Fed is making a speech in Indonesia at 9:30 PM ET. The ‘big’ Fed-speak that many are likely waiting for is on Thursday when we hear from Fed Chair, Janet Yellen.

Yesterday, we heard from Mr. Charlie Evans, and Mr. Evans is a noted ‘dove’ on the Federal Reserve. In his comments yesterday, he continued to talk-up the prospect of two additional interest rate hikes this year. Also yesterday, we also heard from the lone dissenter to last week’s rate hike, Mr. Neal Kashkari, who said he voted against the rate hike because inflation was still below the bank’s 2% target.

The net impact to the U.S. Dollar price action has been even-more weakness, as DXY fell-below the psychological level of 100.00. The Dollar was in a steady up-trend from early-February as we approached last week’s rate decision. The general thought was that given the stability in recent U.S. economic data, last week would’ve been an opportune time for the Fed to go more-hawkish. This didn’t happen, as the bank left rate expectations for rates going out to the end of next year flat; and this gives rise to the expectation for the Fed to continue being passive (dovish) as we’re supposedly going into a rising rate environment.

On the chart below, we’re looking at the recent sell-off in the Greenback. Support at 99.85 is a pivotal level, as this is the 50% marker of the ‘Trump Bump’ move; and just below at 99.23 we have the February low, which could function as secondary support should current levels not-hold.

UK Inflation, Fed-Speak and French Elections as Price Action Drivers

Chart prepared by James Stanley

Euro Shaking on French Elections – This May be a Bumpy Ride

One might think that markets’ tolerance for political volatility to be quite high at the present moment, not a year removed from both Brexit and the rise of Trump. Dutch elections turned out to be far less worrisome than many were expecting, and this appears to have built-in a slight amount of complacency around the upcoming French elections.

In yesterday’s session, the Euro saw a dash of weakness against most currencies ahead of the first round of French Presidential debates. The big worry here appears to be a Marine Le Pen win, as she’s openly discussed the idea of dropping the Euro in favor of alternative monetary structures. So with higher probabilities of a Le Pen win, the Euro has displayed a bit of softness.

But last night’s debate was largely considered to have been ‘won’ by centrist, Emmanuel Macron, and the Euro popped-higher in response. On the chart below, we’re looking at the recent move in EUR/JPY after last night’s French Presidential debates. For those looking to press bullish-exposure here, they’d likely want to wait for a break-above the prior swing-high of ¥122.25 to highlight continuation potential.

UK Inflation, Fed-Speak and French Elections as Price Action Drivers

Chart prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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