[B]Talking Points
• Japanese Yen: WSJ Dollar story and firm equities drive yen close to 104.00
• Euro: Falls apart on WSJ story but recovers in early Europe trade
• Pound: Producer prices soar fueling massive rebound
• Canadian dollar: Housing data on tap
• US Dollar: Monthly Budget statement on tap[/B]
Pound roared back from a steep selloff after UK Producer Prices posted their sharpest increase ever recorded, negating any possibility of a near term BoE rate cut, as inflation pressures continue to plague UK economy. Input PPI rose a staggering 23.1% on an annual basis while output prices increased 7.5%. On a month over month basis the core output reading gained 1.4% versus only 0.6% forecast.
The much hotter than expected reading was the result of soaring food and fuel prices and could push the CPI readings above the key 3% annual rate. BoE Governor King will then need to write another letter of explanation to the Chancellor of Exchequer as he is mandated to do whenever inflation rates exceed 3%. The short term implication of tonight’s data is the it will curtail any market expectation of a BOE rate cut despite clear evidence of deteriorating UK economic conditions.
With oil prices entrenched above $120/bbl the inflationary pressures afflicting UK are not likely to ease anytime soon. BoE’s hands, therefore, may be tied all the way through the summer and that in turn should help the pound stabilize especially against the euro. The EURGBP cross reached record highs this year on the assumption that UK rates would decline much faster than EZ rates, but tonight’s report suggests that the BoE may have to become as vigilant as ECB in order to control runaway inflation.
The EURUSD meantime fared much worse as today’s Wall Street Journal article, headlined “US Spurs G7 Effort to Bolster USD” helped drive the unit down all the way to 1.5365 during Asian session trading. The pair has recovered nearly 100 points since, in the aftermath of UK PPI news that pulled all the anti-dollars higher. Nevertheless, the pair appears to me mired below the 1.5500 level with little speculative appetite for fresh euro longs. Tonight’s weak Italian Industrial production data offered little support to the euro suggesting that Wednesday’s EZ Industrial Production figures may also miss to the downside.
With no key reports on the calendar today, the marquee event for the front part of the week is likely to be the US Retail Sales numbers due tomorrow at 12:30 GMT. As we noted in our weekly, “Given the sharp rise in gasoline which comprises a significant part of the report, the possibility of an upside surprise exits. If that were to occur, dollar’s counter trend rally (against the euro) may pick up steam.” Until then today’s session may simply result into a wary stand off as traders try to ascertain which economy carries more downside risk.
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[B]To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [/B][email protected]