British Pound May Rise as UK CPI Data Keeps BOE Stimulus at Bay

Talking Points:

• British Pound may rise if UK CPI meaningfully surpasses expectations
• German and Eurozone GDP revisions may not mean much for the Euro
• US Dollar looks to Retail Sales data, Fed-speak to feed rate hike bets

UK CPI data headlines the economic calendar in European trading hours. The headline year-on-year inflation rate is expected to rise to 1.1 percent, the highest in two years. The Bank of England has clearly indicated its intention to look through a temporary price growth uptick driven by British Pound weakness following the Brexit referendum. However, the BOE has also said it will not stand idly by if the increase markedly tops expectations or proves sticky. On balance, this suggests a print broadly in line with consensus forecasts ought to pass with relatively little fanfare while an upside surprise may nudge Sterling upward.

A revised set of German third-quarter GDP figuresis expected to show a bit of a downgrade, with output adding 0.3 percent versus the 0.4 percent gain reported in initial estimates. An update of the region-wide GDP metric for the same period is seen confirming the flash reading of 0.3 percent. The implications of such outcomes for near-term ECB policy trends seem relatively limited. This means that – absent sharp deviations from baseline forecasts – the Euro ought to pay little attention to the results. The ZEW Survey of investor confidence may be noteworthy to the extent that it reveals the level of concern about uncertainties linked to Brexit as well as the US presidential election. Here too however, the near-term FX impact may be minimal.

Later in the day, the spotlight will turn to October’s US Retail Sales report as well as comments from Fed Governor Daniel Tarullo, Vice Chair Stanly Fischer and Boston branch President Eric Rosengren. US economic news-flow has improved relative to consensus forecasts over the past month. More of the same this time around coupled with now-familiar cautiously hawkish rhetoric from Fed officials may help further steepen the priced-in rate hike path. Needless to say, such a scenario will probably bode well for the US Dollar.

Financial markets took on a corrective tone in overnight trade. The US Dollar retraced downward having climbed to levels unseen in 9 months against an average of its major counterparts in yesterday’s session. The anti-risk Japanese Yen recovered having borne a good deal of selling pressure amid surging risk appetite in the aftermath of last week’s US presidential election.

See the schedule of upcoming webinars and join us LIVE to follow the financial markets!

Asia Session

European Session

Critical Levels

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

To receive Ilya's analysis directly via email, please SIGN UP HERE

Contact and follow Ilya on Twitter: @IlyaSpivak