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UK CPI Hotter Than Expected; Puts More Pressure on Bank of England

UK CPI Hotter Than Expected; Puts More Pressure on Bank of England

2011-03-22 11:04:00
Joel Kruger, Technical Strategist
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Currencies have been broadly bid in Tuesday trade and continue to find interest on any form of a dip against the beleaguered US Dollar. The big economic release for the day has come in the European session, with UK CPI data coming in hotter than expected to drive relative bids in the Pound on increased speculation that the Bank of England will be forced to respond to the inflationary pressures through the raising of interest rates.

The inflation reading produced the highest year/year number since October 2008 and has propelled Cable to eye a retest of the January 2010 peak. Nevertheless, despite the concerning inflation readings, we remain less certain of any imminent rate hikes from the Bank of England and still feel that there are many shorter-term obstacles that need to be overcomes before worrying about inflation. The latest public finance numbers are a testament to this fact, with the data coming in much worse than expected on Tuesday.

Relative Performance Versus USD Tuesday (As of 10:30GMT)

  1. NZD +1.06%
  2. GBP +0.51%
  3. AUD +0.48%
  4. CAD +0.26%
  5. CHF +0.21%
  6. EUR +0.02%
  7. JPY -0.09%

There have been very few other developments over the past several hours with markets seemingly content on grinding higher until proven otherwise. The latest wave of price action was primarily driven off comments (or lack there of) from ECB President Trichet who basically signaled a rate hike at the next meeting. All else has been quiet, with no worse news out from Japan and the Libya turmoil stabilizing.

The Euro looks poised for a retest and break above critical resistance from November 2010 at 1.4280, while Cable has broken back above 1.6300 barriers and the commodity bloc has come back into favor. Meanwhile, the recently volatile Yen and Franc have been content on some consolidation from their record levels against the Greenback.

With very little in the way of any new stories, we feel it is worth mentioning one potentially USD positive development in the pipeline that could gain some traction. The Homeland Investment Act (“HIA”) is a renewed program to allow repatriation of foreign profits back into the United States at favorable tax rates. The revival of the program has come up in the context of broader corporate tax reform in the United States, with supporters of the act arguing that it provides an attractive and inexpensive stimulus to the economy at a limited d budget cost.

This would be the second round of the HIA, with the first coming in 2005. While it is unclear just how much of an influence HIA1 had on the USD in 2005, it is quite clear that the event did result in some broader USD appreciation, with the buck well bid for the entire year. A second round of HIA should therefore generate another USD positive reaction and could be even more powerful with data showing an even greater amount of funds that could be repatriated this time around.

However, the one caveat that is cited by a well know strategist at a major bank, is that any broad based USD rally on the back of HIA2 would likely be somewhat offset by the need for reserve manager diversification away from the buck. Reserve diversification has been a major theme in the currency markets over the past few years and is expected to result in additional USD selling over the coming years as these managers look to more appropriately balance the weightings of their reserves away from US Dollars.

Still, at the end of the day, HIA2 could very well gain some traction and is definitely something that is worth keeping on the radar screens. This is a story that has been fairly quiet of late and is probably not getting as much attention as is warranted.

Looking ahead, the economic calendar in the North American session is geared towards Canadian data, with the key release coming in the form of Canada retail sales. Also due out are some US housing numbers and Richmond Fe manufacturing. US equity futures are tracking moderately bid, while commodities are slightly lower.

ECONOMIC CALENDAR

UK_CPI_Hotten_Than_Expected_body_Picture_5.png, UK CPI Hotter Than Expected; Puts More Pressure on Bank of England

TECHNICAL OUTLOOK

UK_CPI_Hotten_Than_Expected_body_eur.png, UK CPI Hotter Than Expected; Puts More Pressure on Bank of England

EUR/USD: The market remains very well bid with the latest surge back above 1.4000 opening the next upside extension towards key resistance from November 2010 at 1.4280. Look for a test of this level over the coming sessions, while ultimately, only a break back below 1.3980 would take the immediate pressure off of the topside.

UK_CPI_Hotten_Than_Expected_body_jpy2.png, UK CPI Hotter Than Expected; Puts More Pressure on Bank of England

USD/JPY: The latest violent drop-ff to fresh record lows by 76.35 has been intense, with the market threatening a fresh longer-term downside extension below 80.00. However, given the nature of the move, we would not at this point categorize the downside break as anything significant that alters the medium-term outlook. For now, the sidelines are the best place to be and we will look to see where the market closes this week to gain a clearer perspective. A weekly close below 79.75 might open a retest of the 76.35 spike lows, but any additional declines below 76.00 are seen limited. A weekly close back above 81.20 on the other hand, would take the immediate pressure off of the downside.

GBP/USD: (See Below)

UK_CPI_Hotten_Than_Expected_body_swiss1.png, UK CPI Hotter Than Expected; Puts More Pressure on Bank of England

USD/CHF: The latest break to fresh record lows below 0.9000 (0.8910) is certainly concerning and threatens our longer-term recovery outlook. Still, we do not see setbacks extending much further and continue to favor the formation of some form of a material base over the coming weeks for an eventual break back above parity. Look for an initial break and close back above 0.9100 to relieve immediate downside pressure, while back above 0.9370 will officially confirm reversal prospects and accelerate gains. Only a break and weekly close below the recent record spike lows at 0.8910 ultimately delays outlook.

FLOWS

A US investment name has led dip buying along with real money names in Eur/Usd with model sales capping gains at present. M&A flows supporting the pair after the sale of Deutsche Telekom’s T-Mobile USA to AT&T for $39b in cash and stock. Macro, real money and model types all on the bid for the pound in Cable headline and on Gbp crosses. A Swiss bank leads with various leverage names also noted on the bid in Nzd/Usd.

TRADE OF THE DAY

UK_CPI_Hotten_Than_Expected_body_gbp2.png, UK CPI Hotter Than Expected; Puts More Pressure on Bank of England

GBP/USD: The 1.6300 figure has been a formidable resistance point over the past several weeks and we look for the latest surge above the level to once again be very well capped in favor of a bearish resumption. Clearly any sustained moves above 1.6300 would force a rethink, but until then, fading the strength is the preferred strategy. We will still be very cautious with our entry for the trade and have placed a sell order in a spot where the daily ATR will have been met and the hourly RSI will be through the roof to at a minimum beg for some form of an intraday pullback in our favor. Should the trade trigger, we will reassess the position on the daily close. STRATEGY: SELL @1.6425 FOR AN OPEN OBJECTIVE; STOP 1.6575. RECOMMENDATION TO BE REMOVED IF FAILS TO TRIGGER BY NY CLOSE (5PM NY) ON TUESDAY.

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Written by Joel Kruger, Technical Currency Strategist

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