The euro and British pound both gained against the US dollar, but EUR/USD was ultimately unable to break above the May 14 high of 1.3667 and GBP/USD backed down from the upper end of a channel formation at 1.5525 that has contained price since late April. There were a variety of reports from both the Euro-zone and the UK, though none proved to be highly market-moving. German investor sentiment continued to reflect divergent views on current conditions and the economic outlook in May. Indeed, the ZEW survey on investor confidence in the current situation slipped to -91.3, the lowest since July 2003, from -91.6 while the expectations component surged to a nearly 3-year high of 31.1 from 13.0.
UK inflation data was all-around weaker than anticipated, as the headline consumer price index (CPI) rose 0.2 percent during the month of April (0.4 percent expected) while the annualized rate of growth slowed to a 15-month low of 2.3 percent (2.4 percent expected) from 2.9 percent. Meanwhile, the retail price index (RPI), rose a slight 0.1 percent (0.2 percent expected), allowing the annualized rate to plunge to a record low of -1.2 percent (-1.1 percent) from -0.4 percent. In the end, the decline in headline rates of inflation leaves CPI closer to the Bank of England’s 2 percent target, but with RPI falling rapidly, the central bank may become increasingly concerned about deflation risks and thus, there is potential that they will consider expanding their quantitative easing program.
Looking ahead to Wednesday, the minutes from the Bank of England’s May 7 meeting may not be as market-moving as they’ve been in the past, as there has already been significant detail revealed about the mindset of the Monetary Policy Committee (MPC). Indeed, we already know that the BOE has decided to expand their quantitative easing program by 50 billion pounds to 125 billion pounds, that the drop in Q1 GDP of -1.9 percent was worse than expected, and that CPI will likely will be below the BOE’s 2 percent inflation target in the medium term. However, the growth and inflation outlook published in the BOE’s Quarterly Inflation Report suggests that the central bank may be open to expanding their quantitative easing program later on. If the minutes from the BOE’s most recent meeting reiterate this, the British pound could pull back very sharply.
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Check out the Daily Fundamentals in its entirety for a look at what happened throughout the FX markets today.[/B]