Pound Wobbles on Cold CPI - 2.00 Figure Next?

[B]Talking Points
• Yen: Recovery in Nikkei and bounce in EZ equities brings back the carry
• Pound: Soft CPI suggest that BoE has green light to cut
• Euro: Consolidates at 1.4400
• US Dollar: Housing on tap[/B]

UK core CPI data printed colder than expected at 2.1% vs. 2.2% forecast sending cable tumbling in morning London trade as the news essentially gave the green light to BoE to cut rates further in Q1 of 2008. With core inflation having declined to within a whisker of UK central bank’s target of 2.0%, Mr. King and company will now have much wider leeway to ease monetary policy as they see fit if the country’s economic growth continues to decelerate.

Although traders promptly sold sterling on the dovish inflation news GBPUSD did not breach the 2.1000 barrier and for the time being remains safe above the psychologically important 2.000 level. The pound bear argument is predicated on the idea of additional rate cuts by the BoE in the near future. Tomorrow’s release of the BoE minutes should provide the market with some clues as to the overall bias of the MPC members. However, the true test of the short pound premise may not come until Friday’s release of UK Retail Sales.

In October the number actually contracted on a month over month basis providing an early warning of a slowdown in UK economy. This month consensus calls are for a modest 0.2% gain, but if Retail Sales surprise to the downside again contracting for the second month in a row, expectations of a January rate cut by the BoE will increase markedly and that news could possibly push cable through the 2.0000 support. In the meantime, the dovish data put an end to the slide in EURGBP and that cross looks ready to attempt another run at the 7200 figure as rate expectations in the pair undergo another adjustment.

Today, the US calendar carries only housing data with most market participants by now inured to the bad news. Expectations are for further declines in both starts and permits, but unless the drop is severe the data is unlikely to have much impact on trade. For the time being dollar bulls and bears have come to a wary standstill at the 1.4400 figure and as with holidays quickly approaching these range bound conditions should persist.