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

2016-05-17 05:40:00 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