[B]UK inflation expected to make life difficult for the BoE[/B]
Today’s UK opening call provides an update on:
• Bernanke remains dovish despite inflation fears;
• House prices avoid falling for first time since June 2010;
• UK CPI expected to rise in December;
• EUR/USD, GBP/USD, USD/JPY & EUR/GBP.
Ben Bernanke maintained his dovish tone last night, when quizzed about the Fed’s loose monetary policy at the University of Michigan.
In a brief Q&A following his speech at the University of Michigan last night, Fed Chairman Ben Bernanke defended the central banks’ aggressive monetary policy, playing down fears of future inflation issues and asset bubbles. The comments went some way to playing down fears that the Fed’s loose monetary policy could come to an abrupt end, however there wasn’t the reaction that we’re used to seeing.
This could be because investors remain confident that the Fed will continue with the current policy as long as inflation remains under control. On the other hand, with Bernanke’s second term set to end in January next year, it could be a case of the Bernanke effect beginning to fade in the markets. Unless Bernanke hints at a third term, we could see this more and more as the year goes on.
In the latest sign that the UK’s Funding for Lending scheme is beginning to work, the RICS house price balance was flat in December for the first time in 30 months. The figure has been falling for six months now, with the latest figure well below expectations of an 8% drop. This is a very positive sign for the UK housing market, with house prices now expected to rise this year by 2%.
Higher energy bills are expected to have moved the UK CPI figure within touching distance of 3% in December, only four months after it fell to 2.2%. If it comes out as expected, it will leave the Bank of England’s Monetary Policy Committee between a rock and a hard place when they meet next month, with data released next week expected to show the UK contracted in the fourth quarter.
With a potential triple dip recession on the horizon, the MPC members will have their hands tied and will have to decide whether any additional asset purchases could help the economy avoid a third recession in four years. Not only this but they will have to agree on whether the inflation risk outweighs the benefits of a stimulus package, which based on previous meetings, looks unlikely.
It’s a bit light on the corporate earnings calendar again today, with the season getting in full swing on Wednesday with Bank of New York, Goldman Sachs, JP Morgan and Ebay all due to report.
There is a lot of economic data to get our teeth stuck into though. Over in the US, December’s retail sales data will be released which is expected to show a small increase, while the PPI figure is expected to be less positive at -0.1%. On a more positive note, the empire state manufacturing index is expected to bounce back following a run of five months of negative figures in January, to show manufacturers are more optimistic than they were in the second half of last year.
The euro is trading lower against the dollar this morning. The pair has found resistance around 1.3380 from the 100 week simple moving average, where it has traded below since November 2011. If it break above here in the coming days it should find further resistance around 1.3490, the 50% retracement of the move from May 2011 highs to July 2012 lows. This is also last year’s highs which suggests it will provide further resistance. Just above here as well is the 200 week simple moving average and with the oscillators suggesting the pair is overbought, this could be where we see a trend reversal.
Sterling is trading slightly higher against the dollar this morning after finding support earlier around 1.6060 from both the 50 and 100 day simple moving averages. It is also the 61.8% retracement of the move from Wednesday’s lows to Friday’s highs, which suggests it’s going to be a key level of support.
The dollar is trading lower against the yen this morning. The pair appears to be finding resistance around 90.0, a key psychological level. If today’s candle remains as it is, it would suggest the short term outlook for the pair is relatively bearish. The last two candles have formed a bearish engulfing pattern which would suggest we’re going to see a pull back. This could come back as far as the 200 day simple moving average, around 85.0, to test it as a new level of support, before trading higher. The longer term outlook for the pair remains quite bullish.
The euro is trading lower against the dollar this morning, having found resistance yesterday from the top of the ascending channel. We should now see a pull back in the pair, which has become overbought on the daily chart in recent days, according to both the RSI and the stochastic. The next level of support for the pair is likely to come around 0.8265, followed by 0.8233, the 38.2% retracement of the move from this month’s lows to highs.
Ahead of the open we expect to see …
