Pound Under Pressure As Inflation Data Raises Concerns Of Further Quantitative Easing

DailyFx · April 9, 2009, 6:50am

The pound after reaching an intraday high of 1.4741 sold off sharply ahead of the U.K. PPI figures and the BoE rate decision. The GBP/USD sunk over 100 pips despite expectations that the central bank will keep rates on hold at 0.50%.

[B][U]Talking Points[/U]
• Japanese Yen: ¥154 Billion Stimulus Proposed
• Pound: PPI Slowest In 20 Months
• Euro: Finding Support On Risk Appetite
• US Dollar: Initial Jobless Claims On Tap

[U]Pound Under Pressure As Inflation Data Raises Concerns Of Further Quantitative Easing[/U][/B]

The pound after reaching an intraday high of 1.4741 sold off sharply ahead of the U.K. PPI figures and the BoE rate decision. The GBP/USD sunk over 100 pips despite expectations that the central bank will keep rates on hold at 0.50%. The U.K. PPI slowing to 2.0% which was the slowest in 20 months reinforced the central bank’s contention that inflation will undershoot their 2% inflation target. This raised concerns that more quantitative easing may be ahead as the BoE looks to head off deflationary conditions and improve credit conditions. Although, the MPC doesn’t typical issue a statement following a rate hold, we could see an exception made due to the extraordinary circumstances. If they hint at increasing their efforts to provide liquidity to the markets or that their current efforts aren’t yielding the desired results then more pound weakness could be in store.

The Euro continued to gain against the dollar after finding support yesterday at the 100-Day SMA and is trading above the 1.3300 price level. European equity markets have remained in positive territory though early trading which is providing support for the single currency. Additionally, sterling weakness is pushing the EUR/GBP higher which is setting the tone for all of the crosses. The economic docket has been light to this point with German final CPI numbers remaining unchanged at 0.5% and Italian industrial production falling for an eighth month by 3.5%. The 20-Day SMA lies ahead at 1.3355 as possible resistance. However, a break above there will leave the 4/6 high of 1.3584 as the next barrier.

The USD/JPY reached a high of 100.29 during overnight trading due increasing demand for risky assets and the unveiling of a larger stimulus package proposed by Japan’s ruling party. The plan calls for fresh tax cuts and spending totaling ¥15.4 trillion as the government continues to try and stem the country’s deepening recession. The yen has started to fight back as we see trades start to pare their bets ahead of the Easter holiday falling to 99.80. We may see the pair trade near the 100.00 price level in the short-term, but upside potential remains as long as it remains above the 200-Day SAM at 99.06.

The dollar was mixed overnight as it gained against the pound, yen but lost ground to the Euro and commodity currencies. The clearer theme is the increase in risk appetite which may continue to weigh on the dollar in to the U.S. trading session. However, with the Easter holiday approaching and markets closed tomorrow, we could see traders chose to sit on the sidelines and limit their exposure. Therefore, we may see demand for equities soften as the day goes on, which would add support for the green back. The economic calendar is filled with second tier indicators with the U.S. trade balance presenting the most event risk. The U.S. deficit is expected to remain unchanged at -$36 billion as weak global and domestic demand are expected to offset each other. Initial jobless claims and the ICSC same store sales report will garner some focus due the implications for domestic growth. The unemployment rolls are expected to remain above 600,000 while consumer demand is forecasted to fall by 0.80% signaling that the deteriorating labor market continues to lead consumer to retrench.
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