Pound Higher On Increasing Optimism, BoE on Alert For Resurgence in Inflation

Pound bullish sentiment was bolstered by the BoE minutes which showed the central bank was unanimous in keeping rates on hold at 0.50% and expanding their quantitative easing efforts.

[B]Talking Points
• Japanese Yen: Weighed Despite Increased Risk Appetite
• Pound: BoE Voted 9-0 To Expand Quantitative Easing
• Euro: German Producer Prices Fall Most in Almost 22 Years
• US Dollar: MBA Applications on Tap
Pound Pushes Higher On Increasing Optimism, BoE Minutes Shows MPC on Alert For Resurgence in Inflation. [/B][/U]

Pound bullish sentiment was bolstered by the BoE minutes which showed the central bank was unanimous in keeping rates on hold at 0.50% and expanding their quantitative easing efforts. The central bank felt that the risk of too little stimulus was greater that too much but saw “no pressing need” for a lager expansion of the purchase program than the £50 billion that was agreed upon. Meanwhile, the CBI industrial trends reading saw a slight improvement to -56 from -57, but export orders fell to -446 from -34. Sterling would reach as high as 1.5537 as improving risk appetite was the main driver, but has started to see some selling pressure after it ran into the 200-Day SMA.

The BoE minutes confirmed what markets had already known from the quarterly inflation report which was that there was a high probability of CPI undershooting their 2% target. However, the minutes showed that the MPC was on “alert “for inflation resurging which paints a different picture than their forecast of prices remaining below 2% until 2012 in the quarterly report. The committee still sees a great deal of slack in the economy and that a recovery will be relatively slow which warranted the extension of the bond purchase program. The talk of resurgence in inflation will keep bears cautious especially with the improving fundamentals of the economy; therefore if we see the GBP/USD clear the 200-Day SMA then a test of the 12/17 high of 1.5725 is a possibility.

The Euro also saw bullish sentiment surge at the beginning of the European session after falling to as low as 1.3584 despite bearish fundamental data. April German producer prices fell 2.7% which was the fastest pace in almost 22 years led by a 6.0% drop in electricity costs. The sharp fall oil prices are working their way through the economy as we saw a similar impact when their rose last year. Therefore, we could start to see inflation stabilize over the next few months which is why we have seen the ECB consistently dismiss deflation concerns. Meanwhile, industrial new orders in Italy fell for an eighth straight month as foreign demand fell by 33%, showing that weakness remains in the broader demand. We may see resistance today at yesterday’s high of 1.3671 which could be a sign that a retrace is possible.

The dollar continued to lose ground to most of the majors except the Yen as risk appetite rose through European trading. A better than expected Japanese GDP reading spurred hope of a global recovery despite it showing the steepest contraction on record of 4%. A light fundamental calendar will leave dollar price action at the mercy of the broader themes as only MBA mortgage applications are due for release. Indeed, the most significant event risk from the U.S. session will come in the form of Canadian CPI which is expected to fall to 0.6% from 1.2% in March. However, John Murray, deputy governor of the BOC said in a speech in Philadelphia that “The risks of either a deflationary collapse or an inflationary spiral have been greatly exaggerated,” which could make the release a non-event. Also, be aware that U.S. Treasury Secretary Timothy Geithner will testify at the Senate TARP hearings today and his remarks could spark volatility.

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To discuss this report contact John Rivera Currency Analyst: <jrivera@fxcm.com>