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Forex: British Pound Rallies On Higher Inflation, U.S. Dollar To Regain Footing on Risk Aversion

Forex: British Pound Rallies On Higher Inflation, U.S. Dollar To Regain Footing on Risk Aversion

2011-05-17 12:45:00
David Song, Currency Strategist
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Talking Points

  • Euro: ‘Soft’ Greek Debt Restructuring On The Table
  • British Pound: CPI Inflation Exceeds Forecasts
  • U.S. Dollar: Housing Starts Disappoints, Industrial Production On Tap

The British Pound halted the five-day decline and rallied to 1.6301 on Tuesday as the headline reading for U.K. inflation topped market forecasts for April. Consumer prices in Britain increased at an annualized rate of 4.5% amid projections for a 4.1% expansion, while the core rate of inflation unexpectedly jumped 3.7% from the previous year to mark the fastest pace of growth in at least 14 years. In his letter of explanation to Chancellor of the Exchequer George Osborne, Bank of England Governor Mervyn King said inflation was largely driven by rising commodity prices paired with higher sales tax, and sees price growth gathering pace over the coming months as the central bank sees consumer prices reaching 5% this year.

However, Mr. King warned efforts to ‘quickly’ bring back inflation towards the 2% target could ‘generate undesirable volatility in output and would increase the chances of undershooting the target in the medium term,’ and the recent comments suggest that the MPC will look to gradually normalize monetary later this year as the economic outlook remains clouded with high uncertainty. With the BoE scheduled to release its policy meeting minutes tomorrow, the rebound in the GBP/USD certainly hinges on the vote count for the rate decision in May, and we may see a growing shift within the MPC as Governor King adopts a hawkish outlook for monetary policy. In turn, the British Pound should continue to retrace the sharp decline from earlier this month, and the exchange rate may work its way back 1.6400 as interest rate expectations gather pace.

The Euro struggled to maintain the overnight advance to 1.4223 as the EU considers ‘reprofiling’ the maturities on Greece’s government debt. Euro-group President Jean-Claude Juncker suggested that the ‘a soft restructuring of Greek debt’ could be on laid out on the table and said that the region’s level of debt is unsustainable while speaking in Brussels. As the risk for contagion intensifies, European Central Bank President Jean-Claude may continue to soften his hawkish outlook for monetary policy, and the euro certainly remains at risk of facing additional headwinds over the near-term as policy makers struggle to restore investor confidence. In turn, the EUR/USD looks poised to fall back towards 1.4000 as it searches for support, and the exchange rate may trend lower heading into the second-half of the year as they Governing Council continues to delay its exit strategy.

The U.S. dollar weakened against most of its major counterparts during the overnight trade, but the reserve currency appears to be regaining its footing as investors scale back their appetite for yields. The dismal report for U.S. housing starts and build permits certainly sparked a rise in risk aversion, and the rebound in the USD may gather pace throughout the North American trade as it benefits from safe-haven flows. However, as the Federal Open Market Committee is scheduled to deliver its policy meeting minutes tomorrow, comments from the central bank is likely to heavily influence future price action for the greenback, and we may see Chairman Ben Bernanke continue to highlight the ongoing weakness within the real economy as he aims to encourage a sustainable recovery.

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Related Articles: Weekly Currency Trading Forecast

To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

12:15

09:15

Industrial Production APR

0.4%

0.8%

USD

13:15

09:15

Capacity Utilization APR

77.6%

77.4%

Currency

GMT

Release

Expected

Actual

Comments

CNY

01:50

Actual Foreign Direct Investment (Yoy) APR

36.1%

15.2%

Falls to 7-month low

EUR

06:00

EU-25 New Car Registrations APR

--

-4.1%

3rd contraction in last 4

JPY

06:00

Machine Tool Orders (YoY) APR

--

32.3%

Continues recent weakening trend

GBP

08:30

CPI (MoM) APR

0.7%

1.0%

Inflationary pressures continue to mount as Easter break spurs spending. MPC likely to be unmoved in outlook.

GBP

08:30

CPI (YoY) APR

4.1%

4.5%

GBP

08:30

Core CPI (Yoy) APR

3.2%

3.7%

GBP

08:30

RPI APR

234.6

234.4

GBP

08:30

RPI Ex-Mort Int. Payments (YoY) APR

5.3%

5.3%

GBP

08:30

RPI (MoM) APR

0.8%

0.8%

GBP

08:30

RPI (YoY) APR

5.2%

5.2%

EUR

09:00

Euro-zone ZEW Survey (Econ Sentiment) MAY

17.3

13.6

Lowest since Oct ‘10

EUR

09:00

German ZEW Survey (Econ Sentiment) MAY

4.5

3.1

Lowest since Nov. ‘10

EUR

09:00

German ZEW Survey (Current Situation) MAY

87.5

91.5

Hits record high

USD

12:30

Building Permits APR

590K

551K

Contracts for the first time this year.

USD

12:30

Building permits (MoM) APR

0.9%

-4.0%

USD

12:30

Housing Starts APR

568K

523K

Declines for the second time in 2011.

USD

12:30

Housing Starts (MoM) APR

3.6%

-10.6%

CAD

12:30

Intl Securities Transactions MAR

5.000B

6.339B

Highest since December.

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