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Q1 inflation report weighs on sterling
Publication date: 18 May 2012
Author: Richard Driver, CaxtonFX
Sterling has enjoyed an easy time of it of late but the dovish Quarterly Inflation Report continued to weigh yesterday. This was despite comments from the MPC’s Fisher indicating that a slip into a deep recession would be necessary to justify further quantitative easing from the BoE, which at present does not seem likely.
It’s a fairly empty data calendar today, but we should see some comments emerging from the first day of this weekend’s G8 meeting.
STERLING/EURO: This pair struggled again as investors continued to take profit on GBP’s impressive rally.
• Sterling has come a long way fast against the euro and the dovish inflation report from the BoE has provided a logical opportunity for some profit-taking on this pair’s hefty gains. Today’s G8 meeting could be an important one in terms of settling down the growing panic surrounding Greece, though these summits tend to disappoint and it is more and more difficult to envisage a positive outcome for the country. There was more action from the rating agencies yesterday, with Moody’s downgrading 16 Spanish bank and Fitch downgrading Greece.
• Sterling is trading at €1.2450, downside potential is limited from here and we continue to target higher levels.
STERLING/US DOLLAR: Sterling has had an awful week against the US dollar, as the premium safe-haven flexes its muscles.
• Sterling has declined from $1.61 to $1.58, which amounts to almost a 2.0% fall in the space of three sessions. Sterling has certainly been treated as a safe-haven this year, but the performance of the US dollar amid the growing panic surrounding the eurozone has highlighted the fact that it, along with the Japanese yen, is still a top-tier safe haven currency.
• We are likely to see further risk-off conditions as we head into the weekend, which should see the dollar remain firm. For now this pair trades below $1.58.
EURO/US DOLLAR: This pair has this morning revisited January’s lows below $1.2650 and the euro’s decline is unlikely to stop there.
• Spain got its debt auction away yesterday without too much trouble but the euro understandably failed to find any support. Over in the US, we saw some poor manufacturing data, highlighting the patchy recovery we are seeing at present. This really just added to the risk-off trading conditions and sent this pair lower.
• The euro is trading well below $1.27 this morning and the risks here remain to the downside unless the G8 can pull a rabbit out of the hat. All the while, concerns for countries like Portugal increase.
STERLING/AUSTRALIAN DOLLAR: Sterling headed back up against the AUD as risk appetite took a sharp downturn in Asia last night.
• Sterling found it tough going yesterday but risky assets sold off fairly aggressively last night, not helped by a fresh dose of sovereign and bank credit rating downgrades. Asian stock indices declined by as much as 3.0% last night, which explains why sterling helped itself to a cent and half spike against the AUD.
• Further sterling gains look likely against the AUD as investors run for safety as the weekend approaches.
STERLING/NEW ZEALAND DOLLAR: The kiwi dollar’s respite was short-lived as this pair jumps by 2 ½ cents on Spanish fears.
• With Spanish banks suffering a mass downgrade, fears of a banking collapse in the eurozone’s fourth largest economy are rising. Sharp losses in global equities tells the story here and there is little else driving the kiwi dollar in the current environment.
• As a result, we can only see further losses for the kiwi dollar, which should bring 2.10 back into view for this pair. For now, this pair trades at 2.0850.
STERLING/CANADIAN DOLLAR: It was a case of more sideways trading for this pair as the CAD shows a little more stomach for the fight than other commodity currencies.
• The loonie is not suffering the sharp declines that other commodity currencies such as the AUD and NZD are enduring at present. Sterling is clearly at decent levels against the CAD but gains have been capped somewhat.
• Canada’s monthly inflation data is released this afternoon, which will be of interest in terms of BoC monetary policy. We are expecting to see prices ease somewhat, which may give sterling some support here today. Ultimately, global risk appetite will prove more important, which should keep sterling close to the 1.61 level.
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