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Publication date: 17 May 2012
Author: Richard Driver, CaxtonFX

BoE Q1 inflation report wighed on sterling

Yesterday’s release of the Quarterly Inflation Report from the Bank of England weighed on sterling. The 2-year UK inflation projection was seen lower, while growth expectations were also downgraded, which along with some dovish comments from Mervyn King, stoked fears that the BoE will introduce more QE at some stage.

A minor Spanish auction and some US manufacturing and employment data are the key events on the data calendar. Speculation around Greece’s future remains the market’s first concern.

STERLING/EURO: This pair lost half a cent on perceived dovish signals from the Bank of England.

• As ever with a release like the BoE’s Quarterly Inflation Report, there are plenty of important statements which the market can latch on to. It appears the market paid more attention to a lower long-term inflation forecast and King’s assurance that the door remains to further QE from the BoE. What makes QE unlikely in the near-term is the projection that UK inflation will remain above target until mid-2013.

• We don’t see yesterday’s developments as a game-changer as far as GBP/EUR’s uptrend is concerned, particularly as concerns of capital flight (bank run) from Greece grow. This pair is trading at €1.25.

STERLING/US DOLLAR: The dollar continues to strengthen over the pound, with the US Federal Reserve meeting minutes revealing no new information.

• The Fed is still waiting to see how the US economy recovery develops before considering further quantitative easing. The US economy has slowed down in recent months but not sufficiently to convince the Fed of the need for QE3. Downside risks from the eurozone of course remain a key consideration and the Fed will not hesitate to take action in a worst case scenario.

• The dollar remained firm after the release of the Fed’s minutes and this pair is trading down at $1.59 this morning. There is still plenty of demand for the safe-haven dollar.

EURO/US DOLLAR: The euro traded sideways against the US dollar on Wednesday, though the ECB stoked Greek fears.

• It has been reported that the ECB has excluded four Greek banks in its regular liquidity providing operation, which is hardly conducive to shoring up market confidence in Greece. The fresh Greek elections will be held on June 17th and pro-bailout parties currently look unlikely to secure enough support. In truth, the market is in the dark and a nearly a month of waiting is likely to weigh on the euro further.

• This pair trades at $1.27 and risks are almost perpetually skewed to the downside here, with market confidence continuously on the wane.

STERLING/AUSTRALIAN DOLLAR: A brighter session for Asian equities gave the aussie dollar some further respite.

• A rebound, in the wake of such an aggressive sell-off such as the one we have seen in relation to the aussie dollar this month, is not uncommon and this is what has brought the GBP/AUD off its highs this week. Asian equities staged a minor recovery last night but it is hard to see risk appetite making any sustained recovery amid prevailing eurozone uncertainties.

• Sterling is trading at 1.60 this morning but sterling should avoid further losses, particularly as it benefits from decent support at current levels.

STERLING/NEW ZEALAND DOLLAR: Sterling’s upward progress against the kiwi dollar stalled yesterday but these remain excellent levels.

• Sterling is a cent off its six month highs of 2.09, but this still represents a near 8% climb in the past month. Some better than expected NZ producer prices data also give the kiwi dollar a lift last night, as did a more positive tone in the Asian session.

• This pair is trading at 2.0750 and this recovery for the kiwi dollar should not last too much longer, we still favour sterling.

STERLING/CANADIAN DOLLAR: This remained range-bound as weak US equities cancelled out the effects of the BoE’s Quarterly Inflation Report.

• US equities made further losses on Wednesday, no doubt driven by concerns over Greece and the ECB headline in particular. Today’s US data could provide this pair with some direction, with more strength likely to be indicated within the US manufacturing sector.

• Sterling is trading at 1.61 against the Canadian dollar, right in the middle of this week’s trading range.

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