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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

23:30AUDWeekly Consumer Confidence Index (MAY 15)115.1-113.9
01:30AUDRBA May Meeting Minutes ---
01:30AUDNew Motor Vehicle Sales (MoM) (MAY)-2.5%-2.2%
01:30AUDNew Motor Vehicle Sales (YoY) (MAY)2.4%-4.2%
03:00NZD2Yr Inflation Expectation (2Q)1.64%-1.63%
04:30JPYIndustrial Production (YoY) (MAR F)0.2%-0.1%
04:30JPYIndustrial Production (MoM) (MAR F)3.8%-3.6%
04:30JPYCapacity Utilization (MoM) (MAR)3.2%--5.4%

European Session

07:00CHFTotal Sight Deposits (MAY 13)-491.7bLow
07:00CHFDomestic Sight Deposits (MAY 13)-419.5bLow
07:15CHFProducer & Import Prices (MoM) (MAY)0.1%0.0%Low
07:15CHFProducer & Import Prices (YoY) (MAY)-2.7%-4.7%Low
08:30GBPCPI (MoM) (MAY)0.3%0.4%High
08:30GBPCPI (YoY) (MAY)0.5%0.5%High
08:30GBPCPI Core (YoY) (MAY)1.4%1.5%High
08:30GBPRPI (MoM) (MAY)0.3%0.4%Medium
08:30GBPRPI (YoY) (MAY)1.5%1.6%Medium
08:30GBPRPI Ex Mort Int. Payments (YoY) (MAY)1.6%1.6%Low
08:30GBPPPI Input NSA (MoM) (MAY)1.1%2.0%Low
08:30GBPPPI Input NSA (YoY) (MAY)-6.7%-6.5%Low
08:30GBPPPI Output NSA (MoM) (MAY)0.2%0.3%Medium
08:30GBPPPI Output NSA (YoY) (MAY)-0.8%-0.9%Medium
08:30GBPPPI Output Core NSA (MoM) (MAY)0.1%0.1%Low
08:30GBPPPI Output Core NSA (YoY) (MAY)0.3%0.2%Low
08:30GBPONS House Price (YoY) (MAR)-7.6%Low
09:00EUREurozone Trade Balance SA (MAR)22.0b20.2bLow
09:00EUREurozone Trade Balance NSA (MAR)-19.0bLow

Critical Levels

CCYSupp 3Supp 2Supp 1Pivot PointRes 1Res 2Res 3

--- Written by Ilya Spivak, Currency Strategist for

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