Euro Open: Can Producer Prices Force UK Rate Hike?

Overnight data saw New Zealand economic data fitting into the unfolding recession scenario as May’s New Zealand Retail Sales underperformed expectations. Today’s calendar will be dominated by UK’s June Producer Price Index. While unwilling to crush the fragile economy with a rate hike for the sake of price stability at their last meeting, a substantial upside deviation from expectations could force Bank of England policymakers’ hand and will prove a potent upside catalyst for the Pound.

[B][U]Key Overnight Developments[/U]

• NZ Retail Sales Underperform, Fueling Recession Fears
• Euro and Pound Retreat From Last Week’s Highs[/B]

[U][B]Critical Levels[/B][/U]

The Euro sunk lower overnight from last week’s highs, losing its grip on the 1.59 level as the US Fed and Treasury department stepped in to signal they would bail out lenders Fannie Mae and Freddie Mac. DailyFX Technical Strategist Jaime Saettele reports the pair is biased upward to test all-time highs at 1.6018. Support is seen at 1.5611. Sterling has also inched lower, falling below the 1.99 mark. Support is seen at 1.9648, while resistance stands at 2.0175.

[U][B]Asia Session Highlights[/B][/U]

Fitting into the unfolding recession scenario, [B]May’s New Zealand Retail Sales[/B] underperformed expectations to print at -1.2% versus expectations of -0.1%. The decline was led by automotive and furniture sales, which tumbled -14.8% and -15.6%, respectively. The story is a familiar one at this point – consumers are cutting spending as disposable incomes are eroded by high borrowing costs, booming commodities, and a slumping housing market. NZDUSD spiked 26 pips lower in the first 5 minutes following the release but retraced into the session’s range thereafter. Underscoring the release, [B]QV House Prices[/B] sunk to a new low at 0.1% while the [B]Performance of Services Index[/B] fell further below the 50 boom-bust level to print at 45.6.

[U][B]Euro Session: What to Expect[/B][/U]

Today’s calendar will be dominated by [B]UK’s June Producer Price Index (PPI)[/B]. Firms typically pass on rising production costs to consumers by way of a higher purchase price for the final product, meaning PPI is a good leading indicator for consumer price growth and therefore the overall inflation rate. At their last policy meeting, it became clear that the BoE was not ready to crush the fragile economy with a rate hike for the sake of price stability. That said, a substantial upside deviation from expectations could force policymakers’ hand and will prove a potent upside catalyst for the Pound.
[B]
May’s Euro-Zone Industrial Production[/B] reading will likely disappoint as the by-country metrics for the 15-nation bloc’s top 3 economies all underperformed in the same reference period. The [B]Bank of Japan[/B] will almost certainly keep rates at 0.5% to nurture fragile domestic demand and insulate the vital export sector from an appreciating Yen.

[I]To contact Ilya regarding this or other articles he has authored, please email him at <[email protected]>.[/I]