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FOREX: Pound May Find Only Limited Support as Inflation Accelerates

FOREX: Pound May Find Only Limited Support as Inflation Accelerates

2011-03-22 06:01:00
Ilya Spivak, Sr. Currency Strategist
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Overnight Headlines

  • NZ Dollar Outperforms as IMF Report Feeds Rate Hike Expectations
  • British Pound Consolidates NY-Session Gains Ahead of Inflation Data

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.4157

1.4258

GBPUSD

1.6227

1.6351

The Euro and British Pound were little changed in overnight trade. The single currency consolidated just above the 1.42 to the US Dollar while Sterling oscillated around 1.63 to the greenback. We remain short NZDUSD.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

4:00

JPY

Tokyo Condominium Sales (YoY) (FEB)

24.9%

-

-13.5%

4:30

JPY

All Industry Activity Index (MoM) (JAN)

2.9%

2.8%

-0.3% (R-)

7:00

JPY

Convenience Store Sales (YoY)

6.5%

-

5.1%

The New Zealand Dollar outperformed in otherwise quiet Asian trade, rising as much as 0.5 percent on average against its major counterparts. The advance followed a report from the International Monetary Fund that predicted the island nation’s economy will add a whopping 4 percent in 2012 amid rebuilding efforts following the pair earthquakes that hit Christchurch in September 2010 and February of this year. The economy is expected to grow 1 percent in 2011.

The IMF estimated the cost of damage from the quakes at NZ$15 billion, or 7.5 percent of overall gross domestic product. The lender added that “monetary policy will need to be tightened when it becomes clear that the recovery is under way,” cautioning the RBNZ to “guard against medium-term inflation expectations becoming anchored at too high a level.”

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

7:00

CHF

Trade Balance (CHF) (FEB)

-

1.96B

Low

7:00

CHF

Exports (MoM) (FEB)

-

4.3%

Low

7:00

CHF

Imports (MoM) (FEB)

-

0.3%

Low

9:30

GBP

Consumer Price Index (MoM) (FEB)

0.6%

0.1%

High

9:30

GBP

Consumer Price Index (YoY) (FEB)

4.2%

4.0%

High

9:30

GBP

Core Consumer Price Index (YoY) (FEB)

3.1%

3.0%

Medium

9:30

GBP

Retail Price Index (FEB)

230.6

229

Medium

9:30

GBP

Retail Price Index (MoM) (FEB)

0.7%

0.3%

Medium

9:30

GBP

Retail Price Index (YoY) (FEB)

5.2%

5.1%

Medium

9:30

GBP

Retail Price Index ex Mort Int. Payments (YoY) (FEB)

5.2%

5.1%

Low

9:30

GBP

Public Finances (PSNCR) (£) (FEB)

-4.2B

-14.4B

Low

9:30

GBP

Public Sector Net Borrowing (£) (FEB)

7.6B

-5.3B

Low

9:30

GBP

PSNB ex Interventions (£) (FEB)

7.2B

-3.7B

Low

11:00

GBP

CBI Trends Total Orders (MAR)

-6

-8

Low

UK Consumer Price Index figures headline the calendar in European hours, with expectations calling for the inflation rate to rise to 4.2 percent – a 28-month high – in the year through February. Although the British Pound seems to be looking to risk sentiment as the top driver of price action, the reading may rekindle sagging interest rate hike expectations and offer a near-term boost to the UK unit.

With that in mind, the Bank of England’s latest inflation report made it clear that policymakers were expecting headline price growth to “pick up to between 4 and 5 percent in the near term,” which they chalked up to temporary factors including the increase in the VAT – a consumption tax – as well as higher energy and import prices. The bank added that “inflation is likelyto fall back as those [temporary] effects wane,” repeating largely the same familiar mantra it employed while holding rates at record lows through all of last year.

On balance, this suggests that an increase in CPI in and of itself will be insufficient to truly entrench robust rate hike expectations. For that, markets will look ahead to the publication of minutes from the March sit-down of the rate-setting MPC, with all eyes on policymakers’ voting pattern to see if the hawks managed to lure a fourth BOE official to their side of the spectrum. This would put them just one vote shy of a majority, making a rate increase in the near term a very real possibility. As it stands, futures markets are pricing in the first 0.25 percent hike in benchmark borrowing costs in September.

On the sentiment front, stock index futures tracking key US and European benchmarks are ticking cautiously lower in late Asian trade, hinting risk appetite may be starting to cool after yesterday’s global rally took the MSCI World Stock Index to its largest daily gain in seven weeks. On balance, this opens the door for a recovery in the US Dollar against the spectrum of sentiment-sensitive currencies.

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To receive future articles by email, please contact Ilya at ispivak@dailyfx.com

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