Pound Rises In Inflation Data, Euro Finds Support From Three Year High In Investor Se

DailyFx · June 16, 2009, 7:40am

The Pound rose to as high as 1.6483 as it reversed earlier losses on an improving global outlook and a slower pace of decline for inflation. Indeed, U.K. CPI fell to 2.2% from 2.3% but missed expectations of 2.0% which is the BoE’s target level.

[B]Talking Points
• Japanese Yen: BoJ Raises Outlook, Leaves Rates Unchanged
• Pound: Inflation Falls Less Than Expected
• Euro: German ZEW Jumps to Three Year High
• US Dollar: PPI and Housing Starts On Tap
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Pound Rises In Inflation Data, Euro Finds Support From Three Year High In Investor Sentiment[/B][/U]

The Pound rose to as high as 1.6483 as it reversed earlier losses on an improving global outlook and a slower pace of decline for inflation. Indeed, U.K. CPI fell to 2.2% from 2.3% but missed expectations of 2.0% which is the BoE’s target level. The central bank has forecasted that inflation will fall below their desired level and remain there until 2010. However, improving global and domestic economies have started to raise inflation concerns and may limit the scope of future quantitative easing efforts from the central bank and the interest rate outlook. The GBP/USD found support ahead of the 20-Day SMA at 1.6173 which it has remained above since early May. Upside potential remains as long as we are above the technical level, but a break below could lead to a reversal in momentum.

The Euro reached as high as 1.3930 as a jump in German investor sentiment rose to a three year high of 44.8 adding to the improving global outlook. Signs that the region’s economy is stabilizing lead to sentiment rising from 31.1 and exceed forecasts of 35.0. Meanwhile, Euro-zone CPI fell to 0.0% as the contraction in the economy and the prior drop in energy costs continue to put downward pressure on prices. However, rising energy costs and the economy stabilizing have eased deflation fears which have allowed the ECB to bring their benchmark rate to a record low of 1.00%. Despite the Euro ‘s gains against the dollar it has fallen to its lowest level since December, 2008 against the pound at 0.8439 as there is still lingering concerns over the capitalization of the region’s banks and their lack of transparency. This could be a weighing factor for the single currency going forward and we could see extended losses if the EUR/USD falls below 1.3780 the 38.2% Fibo of 1.2884-1.4340 which provided support today.

The BoJ left their benchmark rate at 0.10% and in a statement said that “Japan’s economic conditions, after deteriorating significantly, have begun to stop worsening.” The central banks raised its outlook for the economy for a second month which sent the Yen soaring 190 pips against the dollar to a low of 96.07. However, we have seen a significant pullback as the pair is receiving support from the 200-Day SMA at 96.46. Despite, the improved outlook, BoJ Governor Masaaki Shirakawa said that there was no guarantee that a recovery could be sustained.

The dollar has given back some of its gains from yesterday as the outlook for the global economy received a boost from the BoJ and there was more talk of replacing the dollar as the world reserve. Russian President Dmitry Medvedev’s reiterated previous rhetoric from the country that an alternative needs to be developed to the greenback, reversing comments from the country’s Finance Minister yesterday. The remarks came ahead of the BRIC conference where it is expected that the emerging market economies will discus diversifying away from the dollar. The economic docket may add to dollar weakness as producer prices are forecasted to fall by 4.4% after a 3.7% drop in April. Lower inflation pressure will allow the Fed to continue its quantitative easing measures and leave rates near zero. Yet, there has been talk that the central bank will need to start tightening to avoid future inflation risks, so a slower rate of decline than expected could spark bullish greenback sentiment. Also scheduled for release are housing starts which are forecasted to rise to 485,000 from 458,000 which could fuel risk appetite and add to the bearish dollar momentum.

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