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British Pound Declines Against US Dollar Ahead of UK Inflation Report

British Pound Declines Against US Dollar Ahead of UK Inflation Report

2010-03-23 06:23:00
Ilya Spivak, Sr. Currency Strategist
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Key Overnight Developments

Japanese Yen Declines as Junker Comments Boost Risk Appetite
• Bank of Japan Split on Economic Outlook, Meeting Minutes Show


Critical Levels

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The Euro and the British Pound traded lower in overnight trade, slipping 0.2 percent against the US Dollar despite a rebound in risk appetite (see below) that would have been expected to weigh on the US unit. We remain short EURUSD at 1.4881 and GBPUSD at 1.5765.


Asia Session Highlights

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The Japanese Yen underperformed in overnight trade, tracking lower against all of its major counterparts as FX carry trades funded cheaply in JPY advanced along with a broad rebound in risk appetite. The MSCI Asia Pacific regional equity benchmark index added 0.3 percent after dropping 1.3 percent – the most in a month – in yesterday’s trade. The mild recovery was chalked up to reassuring comments from Luxembourg Prime Minister Jean-Claude Junker, who said the EU will not “abandon” Greece amid a deepening fiscal crisis. Junker is also the head of the group of Euro Zone finance ministers.

Leaders of the common market will descend on Brussels at the end of this week to mull over a bailout for the beleaguered southern European economy, but prospects for a consensus seem grim with Germany – the region’s largest economy and presumably the largest financier of any rescue effort – becoming increasingly vocal about its opposition to funneling EU funds to Athens, preferring to dump the issue into the lap of the IMF instead. On balance, anything short of a decisive bailout plan in the aftermath of Brussels would likely have severe negative implications for the Euro and risk appetite at large, showing that the world’s largest economy is unable to keep its own house in order.

Minutes from the February’s Bank of Japan monetary policy meeting revealed divisions about the economic outlook, with some members “of the view that upside and downside risks were becoming balanced” while others maintained that the threat of a downside scenario was “considerable”. Deflation remained a key topic of discussion, with some members saying that price declines were “becoming widespread” while others said the central bank must “act swiftly and decisively” in offering support to the economy, especially as firms “attach their expectations to monetary policy.” The session seems to have laid the foundation for the split decision to boost the bank’s lending program to 20 trillion yen in the subsequent month.


Euro Session: What to Expect

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February’s UK Consumer Price Index figures headline the economic calendar in European hours, with expectations calling for the annual pace of inflation to decline to 3.1% from a reading of 3.5% in the previous month. The Bank of England forecast in February that “inflation is likely to remain significantly above the 2% target in the near term [after jumping to 2.9% in January], reflecting the continuing impact of sterling’s depreciation and the restoration of the [value-added tax] rate to 17.5%” having been reduced amid the global recession of 2008-09. However, the BOE argued that “these factors should have only a temporary effect on inflation,” with sluggish economic growth likely to push the rate of price growth back to below the target. On balance this suggests the outcome is well within the central bank’s benchmark scenario and so is unlikely to fundamentally change the market’s outlook for UK monetary policy, hinting that any British Pound gains in the wake of the release will be limited at best. In fact, the slight downward drift in the headline figure coupled with last week’s dour comments from MPC member Andrew Sentence may actually prove to weigh on the UK unit after the numbers cross the wires.


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