[B]Talking Points
• Japanese Yen: DCGPI at fastest rate in 30 years
• Euro: IP declines but French inflation remains hot
• Pound: Hit once again on growth concerns
• US Dollar: CPI on tap[/B]
Another day, another decline in GBPUSD as the currency hit 12 week lows amidst growing concerns over the health of the UK economy. UK labor markets weakened materially in April as jobless claims rose 7.2K from 0K projected with companies hastening their pace of layoffs as demand deteriorates.
Despite persistent problems with price pressures as evidenced by much hotter than expected PPI and CPI readings this week, the BoE may not be able to maintain its battle against inflation by keeping rates steady for much longer if UK economic data shows further signs of weakness. Indeed Governor King himself echoed such sentiments in Boe Quarterly inflation report by noting that MPC is “facing its most difficult challenge yet” and that the UK is on a “bumpy road” as the economy rebalances. He also stated that UK CPI inflation will return to its 2.0% target level leading traders to speculate that the focus of the BoE may shifting to stimulating growth rather than controlling inflation.
Cable fell to 1.9365 in the aftermath of the report, but bounced slightly above the 1.9400 figure into the early morning London trade. Nevertheless, cable is acting like a wounded animal as market consensus now centers on the notion that it is just a matter of time before BOE is forced to ease.
With yesterday’s better than expected US Retail Sales the overall sentiment in the FX market has turned decidedly dollar bullish, as the dominant theme in the market appears to be that US monetary policy easing is nearly complete while rate cutting from the ECB and BoE is just beginning. Today’s US CPI numbers may only reinforce that idea especially if the reading prints hotter than expected. With US consumer demand relatively healthy, the Fed may refocus it attention on growing price pressures in the US economy and choose to remain stationary at the next FOMC meeting relieving some downward pressure in the buck. Still, the pair continues to consolidate below the 1.5500 level and is unlikely to make any meaningful move given the paucity of economic news for the rest of the week. As we noted in our weekly commentary, trade action promises to be one of grinding consolidation with the pair bounded by 1.5600 to the topside and 1.5300 to the downside.
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[B]To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [/B][email protected]