Pound, Euro Shake Off Weak Inflation and Investor Confidence Data On Broader Optimism

DailyFx · October 13, 2009, 6:40am

The British Pound saw whip saw price action overnight as disappointing inflation data led to early weakness only to be retraced. U.K. consumer prices were flat in September which slowed price growth from a year ago to 1.1% from 1.6% the month prior.

Talking Points
• Japanese Yen: Continues to Find Support On Dollar Weakness
• Pound: Inflation Slows More Than Expected
• Euro: Ignores Decline In German Investor Confidence
• US Dollar: Bernanke Talks Rate Hike

The British Pound saw whip saw price action overnight as disappointing inflation data led to early weakness only to be retraced. U.K. consumer prices were flat in September which slowed price growth from a year ago to 1.1% from 1.6% the month prior. Economists were forecasting inflation of 0.3% for the month with the annualized reading falling to 1.3%. A 0.7% drop in food prices offset gains in clothing and household goods to generate the first flat reading in September since records began. The continuing disinflation will leave the door open for more quantitative easing efforts from the BoE which may continue to weigh on the Sterling.

The central bank left interest rates unchanged this month and refrained from adding to their asset purchase program as they decided to wait until November when the initial program ended and the results from the quarterly inflation report will be released. PM Gordon Brown stated yesterday that they must remain maintain stimulus efforts in order to avoid a deeper recession. Therefore, if inflation is expected to continue to dissipate then we may see the MPC decide to take additional measures as credit conditions remain tight and significant slack remain in the economy. This could add to the prevailing bearish sterling sentiment and a test of the 200-Day SMA at 1.5479. The GBP/USD found support at 1.5707-38.2% Fibo of 1.3510-1.7045 a break below the level exposes the downside potential.

The Euro was also schizophrenic overnight as a surprising drop in German investor confidence sunk the single currency 40 pips before it found support. The German Zew survey fell to 56.0 from 58.8, which was the first decline in four months. Concerns are growing that the current recovery is fragile. Current bullish sentiment has the EUR/USD threatening the yearly high of 1.4846. Traders are choosing to ignore the potential pitfalls for the region’s recovery and focus on signs that the worst has passed. The ECB has signaled that they will remain on hold over the near-term as they see risks currently balanced, but a recent surge in interest rates expectations may see traders look to hedge their bets against future tightening. Overnight index swaps were pricing in over 100 bps in rate hikes over the next year yesterday, which was the most since June, 2008 when oil prices were soaring. Therefore, we could see continues Euro support of risk appetite remains strong.

The greenback held firm for most of the overnight as weak European data slowed equity bulls fueling safe haven flows. Despite the signs that there still exist hurdles for a global recovery dollar support has waned as traders are still expecting a robust earnings season. Therefore, markets may take their cue for risk sentiment from Johnson & Johnson’s earnings report as it is the only Dow component reporting today. Meanwhile, European markets are slightly negative with U.S. futures pointing toward a lower open. Tomorrow holds more potential for volatility with retail sales and the FOMC minutes due to cross the wires which may lead to a quiet day today ahead of the event risk. Second tier sentiment indicators only dot the calendar which will be taken in stride with the importance the rest of the week holds. Earnings from JP Morgan, Goldman Sachs and Google are due for release and with all three forecasted to surpass earnings from a year ago more dollar weakness could be in store.

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