This week in the markets: Pound drops on zero inflation
Daily Look

This week in the markets: Pound drops on zero inflation

The dollar started the week on the back foot, with investors continuing to sell after last week’s dovish statement from the Federal Reserve. EUR/USD quickly pushed through both 1.08 and 1.09 on Monday as the markets pushed back the estimated date of the Fed’s first rate hike.

The euro found further support from a better than expected German manufacturing PMI which came in at 52.4 better than the 51.5 expected and the highest release since July 2014. It appears the eurozone’s largest economy is beginning to pick up steam after a sluggish 2014. Tuesday saw the much anticipated CPI release from the UK with inflation falling to zero for the first time in 50 years.

The big contributors to the soft reading were downward pressures on food, furniture and computer equipment prices. The pound immediately weakened on the news and GBP/USD dropped from 1.4950 to 1.4902. The report continued to weigh on GBP/USD throughout the day yesterday and the pair fell to a low of 1.4835 by the end of the day.

By Jake Trask at UKForex, an international money transfer service.

Although it wasn’t particularly good news for the pound, the soft CPI reading shouldn’t come as too much of a surprise to investors as the Bank of England have forecasted that the inflation rate will fall below zero in the coming months, although they say it’s set to be driven by temporary factors.   Later in the day, US CPI was released and printed as expected at 0.2% for February.

The core reading was the same and a little stronger than market expectations but the reaction in the dollar was a bit mixed. The greenback then firmed up later in the day in reaction to a solid Richmond manufacturing index and strong new home sales. European PMIs printed generally stronger than market forecasts yesterday and gave the single currency a bit of a boost. All indices for French, German and European manufacturing and services printed above the 50.0 level, indicating industry expansion, with both German flash manufacturing and European flash services PMIs coming in stronger than market forecasts. EUR/USD pushed through 1.10 on the news and traded to a high of 1.1028. As the dollar strengthened throughout the afternoon, EUR/USD fell back and dropped to an eventual low of 1.0890.

Wednesday began on a positive note for the euro with the monthly IFO Business Climate Survey from Germany coming in at a better than expected 107.9. The reading was the best since July 2014’s 108.0 reading, taken as evidence of further improvement in the Germany economy. Cable started the day sub-1.49 and rallied at 12:30pm following the release of weaker than expected US durable goods orders. Demand for these goods unexpectedly dropped in February by 1.4% vs. predictions for a rise of 0.3%. The dollar fell and cable rallied to 1.4946.

As the day went on, the pair fell back towards the 1.49 figure, a reaction to some fairly hawkish comments from US Fed member Lockhart. He said that the only reason the central bank wouldn’t hike rates in September would be if “we were really disappointed in the stream of data that comes in”. Thursday saw the pound rise as monthly retail sales data beat forecast to show 0.7% growth for February. The report was the 23rd in succession showing year on year growth, the longest run since 2008. It also confirmed prices in stores had fallen for eight consecutive months, driven lower primarily by falling food and fuel costs, the latter having dropped 15.5% since a year ago!

GBP/USD pushed up to a session high of around 1.4990 immediately after the release, but failed to break through the psychological 1.50 barrier. Given the zero rate of inflation (likely to dip into negative territory in the coming months) and the uncertainty surrounding the outcome of the general election, it is likely GBP/USD will remain under pressure for some time to come.

A better than expected US unemployment release of 282k (against an expectation of 291k) helped strengthen the dollar throughout the afternoon. Friday’s focus is the final estimate of Q4 GDP from the States with a slight uptick to 2.4% from the last reading of 2.2% expected. Janet Yellen talks in San Francisco this evening at a conference called “The New Normal for Monetary Policy”.

Next week’s big event is the eurozone’s preliminary reading with further move into negative territory expected on the back of the collapsing oil price. We also have manufacturing and construction PMIs from the UK.

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