British rates may overtake US rates as soon as next month

The Yen on Monday dropped to record lows against the Euro and fell to its lowest against the Dollar since February after the Group of Seven passed over the issue of the Japanese currency’s weakness. Investor’s appetite for high-yielding currencies also helped propel Sterling to a near 15-year peak above 1.99 as strong British data reinforced the view that the Bank of England will raise interest rates again as soon as next month. GbpUsd rallied to 1.9940, its highest since September 1992.
At weekend meeting in Washington, G7 finance ministers reiterated calls for exchange rates to reflect economic fundamentals and urged greater currency flexibility in China.
Yesterday’s rise in the value of US retail sales was largely due to higher energy prices. Total sales increased by 0.7% in March, core sales (ex- autos) rose by 0.8%; almost half the gain was due to the surge in gasoline prices, which pushed up the value of sales at gasoline stations by 3.1%.

News and Events:
The Yen on Monday dropped to record lows against the Euro and fell to its lowest against the Dollar since February after the Group of Seven passed over the issue of the Japanese currency’s weakness. Investor’s appetite for high-yielding currencies also helped propel Sterling to a near 15-year peak above 1.9900 as strong British data reinforced the view that the Bank of England will raise interest rates again as soon as next month. At weekend meeting in Washington, G7 finance ministers reiterated calls for exchange rates to reflect economic fundamentals and urged greater currency flexibility in China.
Yesterday’s rise in the value of US retail sales was largely due to higher energy prices. Total sales increased by 0.7% in March, following a revised 0.5% increase the month before (previously 0.1%). Consensus was 0.6%. Meanwhile, core sales (excl. autos) rose by 0.8%, with the February figure revised up by 0.5% to 0.4%. Consensus there was 0.9%. However, almost half the gain was due to the surge in gasoline prices, which pushed up the value of sales at gasoline stations by 3.1%. Looking ahead, the lagged impact of last year’s housing market slowdown and the downward trend in consumer confidence means that consumption growth is still likely to slow sharply over the next few months.
EurJpy rose to a record high 162.42 before trimming gains to 162.03 still up 0.44%. UsdJpy rose as high as 119.88, its highest since late February, before trading last at 119.76, up 0.44%. EurUsd hit a two-year high 1.3577 but pared gains to 1.3530, flat on the day. GbpUsd rallied to 1.9940 high, its highest since September 1992, after strong Producer Prices and Housing Data helped expectations that British rates will overtake US rates as soon as next month. GbpUsd ended +0.12% at 1.9887.

Today’s Key Issues:

GB 8:30 GMT: March Consumer Price Index 0% to 0.4% vs 0.4% (MoM) and 2.6% to 3% vs 2.8% (YoY)

GB 8:30 GMT: March Retail Price Index 0.5% vs 0.7% (MoM) and 4.6% unchanged (YoY)

Euro 09:00 GMT: April German ZEW survey, Sentiment 6.2 to 20 vs 5.8, Current Situation 64 to 72.5 vs 69.2

Euro 09:00 GMT: April Euro-zone ZEW survey Sentiment4.5 to 10 vs 5.1

US 12:30 GMT: Fed’s Plosser speaks on Economic Outlook in New Jersey

US 12:30 GMT: March Consumer Price Index 0.6% vs 0.4% (MoM) and 2.8% vs 2.4% (YoY). Ex-food & Energy 0.2% unchanged and 2.6% vs 2.7% (YoY)

US 12:30 GMT: March Housing Starts 1495k vs 1525k, Building Permits 1515k vs 1532k

CAD 12:30 GMT: February Manufacturing Shipments -2% to +1.5% vs -2.1% (MoM)

US 13:15 GMT: March Industrial Production -0.3% to 0.2% vs 1%

Euro 15:00 GMT: ECB’s Trichet holds a speech in New York

US 16:30 GMT: Fed’s Geithner gives keynote speech on Euro, Dollar

NZD 22:45 GMT: 1Q Consumer Price Index 0.5% vs -0.2% (QoQ)

The Risk Today:

EurUsd uptrend remains intact. The move above the 1.3482 reaction leaves this bullish pattern with little resistance till the 1.3666 all-time high from December 2004. Last Friday’s 1.3482 intraday low offers initial support. Further advance may clear again 1.3554 Friday’s high and 1.3577 intraday high.

GbpUsd approaches key psychological 2.00 level. Sterling has pushed above the 1.9826 former resistance and violated the 1.9917 late January trend high. There is an Elliott-wave measured target at 1.9946 (1.9194 plus the distance in the 1.7048-1.7810 late-2005 advance), but little above there till the 2.000 psychological level and the 2.0100 high from September 1992. Only a return below 1.9850, former resistance, would put the bull trend on hold in the short term. Initial support is at the 1.9864 Friday’s high.

UsdJpy is narrowing near 119.49 (61.8% retracement of the 122.20-115.15 decline). The break paves the way for a climb towards the 76.4% retracement level at 120.54 into focus. Monday’s 118.97 low offers initial support, but only a break of last Friday’s 118.21 low would damage the underlying short-term bull trend

UsdChf recent weakness has little support below last Friday’s 1.2068 low till the 1.2030 mid-March low. Initial resistance is at last Wednesday’s 1.2247 peak, but only a move above last Monday’s 1.2285 high would offset the current bearish bias.

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Resistance and Support:

By Jean-Claude Braha, ACM Advanced Currency Markets, Geneva, Switzerland