Pound, Euro Higher on Flat U.K. Inflation and Jump In German Investor Sentiment

DailyFx · August 18, 2009, 6:10am

The pound found support overnight on renewed risk appetite and stabilizing consumer prices which helped pushed the GBP/USD briefly back above the 50-Day SMA at 1.6461. Inflation in July was flat which left the annualized rate at 1.8% versus expectations of a drop to 1.5%.

[B]Talking Points
• Japanese Yen: Under Pressure As Equities Find Support
• Pound: Inflation Unexpectedly Flat For July
• Euro: German Zew Rises To Highest in Over Three Years
• US Dollar: PPI Housing Starts on Tap
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Pound, Euro Higher on Flat U.K. Inflation and Jump In German Investor Sentiment[/U]
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The pound found support overnight on renewed risk appetite and stabilizing consumer prices which helped pushed the GBP/USD back above the 50-Day SMA at 1.6461. Inflation in July was flat which left the annualized rate at 1.8% versus expectations of a drop to 1.5%. Rising costs for housing, automobiles and alcohol were offset by declines in food and clothing preventing a sixth straight decline in prices. The threat of rising inflation will raise interest rate expectations and could continue to provide sterling support.

Traders shouldn’t get too caught up in the inflation data as the BoE warned that we could see volatility but they expect that inflation will remain below their 2% target for the rest of the year. If the central bank viewed rising prices as a threat then they might have reconsidered the £50 billion that they recently added to their asset purchase program. The pledge to add further liquidity has been a weighing factor for the pound and if we fail to see today’s break back above the 50-Day SMA hold then there could be further downside potential. A test of 1.6034-38.2% Fibo of 1.4395-1.7044 still appears likely.

The Euro also made a steady ascent during early trading reaching as high as 1.4154 on a spike following a jump in German investor confidence. The German ZEW survey rose to 56.1 from 39.5 which was the highest since April, 2006. The reading shattered expectations of 45.0 as the outlook for exports especially automobiles significantly improved. Looking at the sector breakdown we also saw sharp rises in finance and insurance as it appears that we have moved beyond the credit crisis. Positive European equity markets are also providing support for the single currency but we have started to see gains stall which could lead to Euro weakness and a resumption of its recent bearish trend. Failure to break back above 1.4200 could lead to a test of 1.4000 with potential to 100-Day SMA at 1.3809, but the 50-Day SMA at 1.4089 remains supportive and is a key level to watch.

The dollar has started to give back its gains from yesterday as expectations for positive fundamental data has seen bargain hunters take advantage of the recent declines in equities and commodities. The pick up in risk appetite is weighing on the greenback and could continue if we see U.S. housing starts improve as expected. Early forecasts are for a rise to 598k from 582k raising hopes for the sector which has seen significant layoffs in recent months. U.S. producer prices will also present some event risk as the anticipated decline to -5.8% from -4.6% will allow the Fed to keep rates at their current levels. This could lower interest rates expectations which had started to increase as fears grew that increased inflationary pressures would force the central bank to begin tightening sooner than previously expected. However, prevailing concerns over future growth may ultimately lead to dollar support returning, especially if the housing data disappoints.

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