Pound Rises Despite 15 Month Low Inflation, Euro Higher As German ZEW Jumps To Three

DailyFx · May 19, 2009, 6:20am

The pound shot higher at the beginning of the European session as bullish equity markets helped provide support for the currency. Surprisingly sterling temporarily extended its gains post a softer than expected consumer price report which showed inflation easing to 2.3% from 2.9% on an annualized basis in April.

T[B]alking Points
• Japanese Yen: Weighed Despite Increased Risk Appetite
• Pound: CPI Falls To 15 Month Low
• Euro: German ZEW at Three Year High
• US Dollar: Housing Data on Tap

[/B][U][B]Pound Rises Despite 15 Month Low Inflation, Euro Higher As German ZEW Jumps To Three Year High[/B][/U]

The pound shot higher at the beginning of the European session as bullish equity markets helped provide support for the currency. Surprisingly sterling temporarily extended its gains post a softer than expected consumer price report which showed inflation easing to 2.3% from 2.9% on an annualized basis in April. The depreciation in prices was more than the 2.4% that was expected by economists and the lowest in 15 months. April saw fuel & light costs fall by 2.8% followed by a 0.7% drop in home values. Housing prices have been the biggest drag on the index as they have fallen by 12.1% on an annualized basis. A 5.2% fall in clothing costs demonstrates the impact the recession has had on consumer consumption, but the component has improved over the past five months which could be a sign that demand is building.

The inflation results weren’t a surprise to market participants after the BoE projected that inflation will fall below its 2.0% target and remain there until 2012 in its quarterly inflation report. The MPC minutes due out tomorrow may also have the steam taken from them after the quarterly inflation report provided the justification for the central bank to add to its quantitative easing measures by another £50 billion. An expected 0.5% increase at the end of the week in retail sales may help build on the cable’s gains as it would add the signs that the recession is slowing. The 5/8 high of 1.5375 has been over taken leaving the 200-Day SMA as the next possible resistance at 1.5570. However, we are seeing some resistance at the psychological level of 1.5500

The Euro also saw steady gains through overnight trading reaching as high as 1.3657 after the German ZEW survey crossed the wires at a three year high of 31.1. However, the bullish response was limited as the sentiment gauge also showed that existing conditions are worsening with the reading falling to -92.8 from -91.6. Additionally, Euro-zone construction with a print of -1.0% added to the dismal economic picture. It was the consecutive drop in activity for the region and a sign that the recession may not have bottomed leaving more work for the ECB. Indeed, committee member Tumpel-Gugerell statements that it was too early to say that the financial crisis was at an end confirmed what the data was saying and could be a sign that further easing and non-standard measures are ahead. This view could add weight to the euro which continues to remain supported by the increasing risk appetite.

The dollar has remained under pressure as the demand for risky assets carried over from the U.S. session yesterday into Asian and European markets. Additionally, JP Morgan Chase Co, Morgan Stanley, and Goldman Sachs are rumored to have asked permission to pay back over $45 of TARP funds. This should help restore confidence to the banking system and has U.S. futures in positive territory. Yesterday we saw the NAHB index rise to 16 from 14 and Treasury Secretary Tim Geithner purport that credit markets have thawed and the economy is stabilizing. Therefore, if we see a strong housing starts report today, equities could extend yesterday’s rally which could signal more dollar weakness. New construction is forecasted to rise to 523,000 from 510,000 which would add to the improving picture for the housing sector and the economy. Also, the VIX falling below 30 for the first time since September, 2008 should fuel risk appetite as the declining volatility will make stocks more attractive.

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