Second place for UK CPI

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Idea of the Day

Focus back with sterling today as the inflation numbers are released and the currency reaction could be interesting. Officially, the UK central bank still targets inflation at 2%, so the inflation numbers are the most significant data release for the pound. Now, with the Bank having said that rates will remain low so long as the unemployment rate remains above 7% (with some get out clauses), the dynamics for FX have changed. The currency is likely to be less sensitive to stronger data (thinking it will bring forward the time rates increase) but will in turn be a lot more sensitive to tomorrow’s labour market numbers. We’ll talk about that tomorrow, but for now, the sterling reaction to today’s numbers are likely to be a lot less dramatic in comparison with the recent history.

Update: UK Inflation stands at 2.8%, within expectations – GBP/USD chops back up

20130813 Table

Data/Event Risks

GBP: Inflation data is released today. Headline prices are seen nudging lower to 2.8% YoY, which is flat on a monthly basis. Sterling could well be less sensitive to these numbers than usual, knowing that even if inflation does move higher, the new employment ‘intermediate target’ would need to move lower before it could start having a significant impact on the outlook for rates and hence the currency. Employment data is released on Wednesday.

EUR: German ZEW data is a survey of finance professionals based on a series of questions. There can be leading properties (so moving before events in the real economy), but these are not always that strong. Still, the expectations component has been relatively steady for the past 4 months, having peaked at 48.5 earlier in the year (last was 36.3). Stronger reading would be taken as positive for the single currency.

Latest FX News

JPY: Second guessing the yen is not the easiest game in town right now, weaker by nearly 1% over the past 24 hours. Stocks have climbed overnight (just over 2.5%). Bond yields also moving lower, undermining the currency.

AUD: Aussie modestly weaker overnight, moving back below the 0.92 level and keeping in the frame the notion that we remain in a wider bear trend, characterised by periods of correction. Business confidence data fell.

GBP: More good news for the housing markets, with the latest survey from the RICS organisation showing the survey balance at 36, from 21 previously. Cable getting a small lift at the start of the European session, up from 1.5460 to 1.5480.

Further reading:

Slower Japanese growth may lead to further stimulus

EUR/USD Aug. 12 – Pressured after failing to break higher; Greek speculation weighs

Get the 5 most predictable currency pairs

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