UK inflation figure likely to show weaker price pressures

Publication date: 14 August 2012
Author: Richard Driver, CaxtonFX

After a quiet start to the week, there are plenty of market-moving events scheduled for today. The monthly UK inflation figure is likely to show weaker price pressures, though this shouldn’t hurt the pound too much given that the BoE has pretty much ruled out an interest rate cut and made it clear it is in wait and see mode with respect to the option of further quantitative easing.

Today’s session is an important one for the euro, with Greece going to the market in search of some much needed debt, while the eurozone GDP figure for Q2 is also released. Hopes for this figure have been elevated in light of a strong showing from Germany this morning.

STERLING/EURO: The euro is back in the spotlight as Greece attempts to raise €3.1bn to avoid default.

• This pair gave back some of last week’s gains but had steadied despite some weak house price data overnight. The euro received some bad news in the form of a law suit filed in the German constitutional court, which seeks to delay Germany’s ratification of the ESM until the European Court of Justice’s opinion has been sought. This just spells out more delay to eurozone progress.

• Data yesterday confirmed that Greece remains deep in recession, contracting at an annualised pace of 6.2% in the second quarter. Greece will be selling short-term debt today to raise cash to avoid a default, though demand is likely to be firm. This pair is trading at €1.27 and the euro is likely to remain strong after this morning’s strong German GDP data.

STERLING/US DOLLAR: Sterling continues to test the $1.57 barrier but lower levels are still very likely.

• A recovery in EUR/USD kept GBP/USD up at the top of its long-term trading range. US retail sales are expected to be strong this afternoon, which could well be positive for risk appetite and thus dollar-negative.

• News from Europe has been positive this morning, which is likely to help this pair continue hovering around the $1.57 level. A break of $1.5750 could signal a move to higher levels, though we think resistance will prove too stiff.

EURO/US DOLLAR: Data has revealed that the German economy performed better than expected in Q2, which has given the euro a strong start.

• Germany grew by 0.3% in Q2, which is more than expected. Meanwhile, France avoided the dip into contraction that was expected, posting a figure of 0.0%. Forward looking data suggests the two economies will not be so lucky next time around but this is still good news and European equities have shot up this morning. We have the full eurozone GDP number released at 10:00, which looks set to come in better than expected in light of what we have learnt already this morning.

• This pair is trading up at $1.2375 and despite this morning’s good eurozone news, resistance is likely to be met at $1.24.

STERLING/AUSTRALIAN DOLLAR: This pair continued its slow recovery as the market reflects on lack of Chinese monetary easing.

• The aussie dollar is still struggling on the back of the People’s Bank of China’s decision to cut its interest rate to boost Chinese economic growth. There was some good news out of Australia last night though, with a gauge of business confidence equalling the highest level seen in the past year.

• Sterling is trading at 1.49 this morning and if this morning’s positive trading conditions remain intact, sterling may give back some of yesterday’s gains.

STERLING/NEW ZEALAND DOLLAR: Better than expected NZ retail sales data limited sterling’s gains last night.

• Whilst the quarterly growth figure for core retail sales (excluding automobiles and petrol stations) came in at 0.9%, slightly below expectations, the overall retail sales number came in at 1.3% growth, well above expectations of a 0.7% figure. There was no rally in the kiwi dollar though, particularly in light of last week’s disappointing kiwi employment data.

• Sterling is trading slightly higher up above 1.9350 and another attempt at 1.94 is likely today.

STERLING/CANADIAN DOLLAR: Sterling had a decent day against the commodity currencies yesterday, helping this pair climb by a cent off its recent lows.

• Sterling edged off its lows against the loonie yesterday but lower targets remain intact, particularly if today’s US retail sales comes in positively as is expected. Oil prices are elevated up at $114 per barrel, while this morning’s positive eurozone GDP data is likely to feed into a stronger day for US equities.

• Sterling is trading just below 1.56 and may run out of momentum against the loonie, which has been a top performer of late.