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British Pound Volatility Likelier on Firm vs. Soft UK CPI Data

British Pound Volatility Likelier on Firm vs. Soft UK CPI Data

Ilya Spivak, Head Strategist, APAC

Talking Points:

  • British Pound volatility risk tilted to the upside as UK inflation data looms
  • US Dollar may resume advance if CPI figures rekindle Fed rate hike bets
  • Hawkish shift in US monetary policy views to weigh on Aussie, NZ Dollars

UK CPI figures headline the economic calendar in European trading hours. The headline year-on-year inflation rate is expected to remain unchanged at 0.5 percent in April while the core figure – a measure of the underlying price growth trend that excludes volatile components like food and energy – ticks lower from 1.5 to 1.4 percent.

News-flow out of the UK has increasingly underperformed relative to consensus forecasts since early April, hinting that economists’ models may be calibrated for a rosier environment than reality has confirmed. This opens the door for a downside surprise, though the implications of such an outcome for the British Pound seem limited considering there is little room for deterioration in the BOE policy outlook. Indeed, a rate hike is not expected until late 2017.

On the other hand, an upside surprise clashing with status-quo bets and forcing a degree of portfolio readjustment may encourage volatility. Leading survey data from Markit Economics offers some evidence in favor of such a narrative: deflationary pressure in the construction sector continued to ease while service-sector price growth hit the highest level in 27 months in April. A firm print may boost Sterling in the near term but follow-through may prove limited while traders remain pre-occupied with the “Brexit” referendum.

Later in the day, US CPI data captures the spotlight. The report is expected to show the spread between headline and core CPI hit a three-month low, which may bolster the Fed’s argument that transitory disinflationary pressure is fading and lay the groundwork for a sooner rate hike than investors have accounted for. Indeed, Fed Funds futures imply a mere 4 percent probability of tightening next month.

Figures suggesting a more hawkish posture are likely to drive the US Dollar higher, rekindling last week’s upside momentum after yesterday’s corrective pullback. Sentiment-sensitive currencies seem likely to underperform in such a scenario, with the Australian and New Zealand Dollars following share prices downward.

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Asia Session

GMT

CCY

EVENT

ACT

EXP

PREV

23:30

AUD

Weekly Consumer Confidence Index (MAY 15)

115.1

-

113.9

01:30

AUD

RBA May Meeting Minutes

-

-

-

01:30

AUD

New Motor Vehicle Sales (MoM) (MAY)

-2.5%

-

2.2%

01:30

AUD

New Motor Vehicle Sales (YoY) (MAY)

2.4%

-

4.2%

03:00

NZD

2Yr Inflation Expectation (2Q)

1.64%

-

1.63%

04:30

JPY

Industrial Production (YoY) (MAR F)

0.2%

-

0.1%

04:30

JPY

Industrial Production (MoM) (MAR F)

3.8%

-

3.6%

04:30

JPY

Capacity Utilization (MoM) (MAR)

3.2%

-

-5.4%

European Session

GMT

CCY

EVENT

EXP

PREV

IMPACT

07:00

CHF

Total Sight Deposits (MAY 13)

-

491.7b

Low

07:00

CHF

Domestic Sight Deposits (MAY 13)

-

419.5b

Low

07:15

CHF

Producer & Import Prices (MoM) (MAY)

0.1%

0.0%

Low

07:15

CHF

Producer & Import Prices (YoY) (MAY)

-2.7%

-4.7%

Low

08:30

GBP

CPI (MoM) (MAY)

0.3%

0.4%

High

08:30

GBP

CPI (YoY) (MAY)

0.5%

0.5%

High

08:30

GBP

CPI Core (YoY) (MAY)

1.4%

1.5%

High

08:30

GBP

RPI (MoM) (MAY)

0.3%

0.4%

Medium

08:30

GBP

RPI (YoY) (MAY)

1.5%

1.6%

Medium

08:30

GBP

RPI Ex Mort Int. Payments (YoY) (MAY)

1.6%

1.6%

Low

08:30

GBP

PPI Input NSA (MoM) (MAY)

1.1%

2.0%

Low

08:30

GBP

PPI Input NSA (YoY) (MAY)

-6.7%

-6.5%

Low

08:30

GBP

PPI Output NSA (MoM) (MAY)

0.2%

0.3%

Medium

08:30

GBP

PPI Output NSA (YoY) (MAY)

-0.8%

-0.9%

Medium

08:30

GBP

PPI Output Core NSA (MoM) (MAY)

0.1%

0.1%

Low

08:30

GBP

PPI Output Core NSA (YoY) (MAY)

0.3%

0.2%

Low

08:30

GBP

ONS House Price (YoY) (MAR)

-

7.6%

Low

09:00

EUR

Eurozone Trade Balance SA (MAR)

22.0b

20.2b

Low

09:00

EUR

Eurozone Trade Balance NSA (MAR)

-

19.0b

Low

Critical Levels

CCY

Supp 3

Supp 2

Supp 1

Pivot Point

Res 1

Res 2

Res 3

EUR/USD

1.1242

1.1282

1.1301

1.1322

1.1341

1.1362

1.1402

GBP/USD

1.4219

1.4301

1.4352

1.4383

1.4434

1.4465

1.4547

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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