Acute fear of looming inflation have made the Bank of England reluctant to stimulate sagging growth with a rate cut, bringing the Pound’s pairing with the Euro off record highs near 81.00. For its part, the ECB has been firmly on hold for months and is likely to remain as the most recent CPI showed prices growing at 3.7%. Both countries face deterioration in growth prospects at the hands of the US-led global slowdown. A heretofore expected divergence in monetary policy has now given way to symmetry, locking EURGBP in a range since the trend topped out.
[B]Trading Tip[/B] – Current inflationary trends have been driven by rising commodity prices, particularly that of oil. Mounting evidence seems to suggest that the oil rally owes more to US dollar weakness than the supply and demand for crude (see article). Traders would be wise to monitor the US dollar for a clue to where oil may be headed next, as that will surely impact the monetary policy symmetry currently driving EURGBP.
[B]
Event Risk for Europe and the UK[/B]
[B]Europe [/B]– With Italian Current Account and Trade Balance figures unlikely to cause a stir, the last significant item on the European docket is Germany’s May PPI release. This is forecasted to come in stronger and will surely not disappoint as production input prices have been skewed upward by buoyant commodity markets. Producers tend to pass on higher production costs by raising prices for the finished product, so a rise in PPI will bid up consumer prices and thereby overall inflation. Germany accounts for about one quarter of overall Euro Zone GDP, so inflationary trends there will play a big part in the markets’ ECB policy outlook. Next week opens with the May issue of Germany’s IFO Survey, a broad metric of economic health. Traders will look for the Expectations component to read below 100. This would mean the economy is contracting, which might offer some relief to building inflationary pressure. German’s June CPI and France’s May PPI readings will go further still to shape ECB outlook. The week closes with France’s GDP reading for the first quarter, a release that will likely be overlooked given Trichet and company’s focus on inflation over growth.
[B]UK [/B]– Retail Sales data for May will be released on Thursday, but is expected to come in only slightly better than it did the month prior. Perversely, a positive surprise would actually burden the BoE as policy makers juggle lower growth and creeping inflation. Recent BoE minutes have shown that at least one member of the bank is critically worried about growth, voting to cut rates by 25 basis points. Most notably, the two preceding Retail Sales releases failed to spark volatility in EURGBP, adding some credence to the continuation of a range-bound scenario through this announcement. Next week’s docket is noticeably empty, with event risk entering the picture only Friday with first quarter GDP and Current Account figures. With the market’s focus resting squarely on inflation expectations, only an unlikely upside surprise for these two readings is likely to command attention as it would put further upward pressure on the price level.
[I]To contact Ilya and Luis with comments regarding this or other articles they have authored, please email them at <[email protected]>.[/I]