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GBP:  The inflation data today will be a key focus, with PPI (producer prices) also released.   We would agree with the market view that CPI inflation should moderate from 2.8% to 2.6%.   If seen, this would be the first fall in headline inflation for 7 months.   For now, it’s unlikely that sterling will be badly hit if we see a number lower than 2.6% as for now, expectations of more QE are being held back by the transition to the new Governor. Update: British inflation slides, GBP/USD follows.

USD: The dollar is waiting for the Fed minutes tomorrow and the testimony by the Fed Chairman Bernanke to Congress. There are more speakers from the US Fed today and dollar is proving to be more sensitive than normal to what members are saying. Both Bullard and Dudley are currently voting members of the FOMC.

Idea of the Day

It’s been something of a fight but sterling has been struggling to keep its head above water after last week’s more upbeat news from the Bank of England, fighting against the stronger tone of the dollar.   For the first time in recent history, the Bank was able to downgrade inflation forecasts and upgrade growth.   A couple of years ago, the UK was beset by inflation coming in above expectations, but the past 5 releases have come in bang in line with market expectations. It has been 11 months since inflation has come in below expectations, so if seen, this could be taken as a further sign of good news on the economy.   Sterling is unlikely to fall significantly on this scenario as expectations of further quantitative easing are constrained by the fact that the market is not going to push for more QE until the new governor is at the helm of the Bank in July.

Latest FX News

JPY:  A modestly weaker tone to the yen, with the latest BoJ meeting taking place today and tomorrow.   After the extent of policy measures announced in April, there are no strong expectations of more from this week’s meeting, but the market is naturally a little nervous nonetheless.

AUD:  If the gains made in the Asia session are maintained, then this will be the first time this month the Aussie has risen on two consecutive days.   The minutes to the RBA meeting (where rates were cut to 2.75%) did not boost near-term rate cut expectations, allowing the Aussie to outperform in the Asia session for the second consecutive day.

NZD:  A second day of gains, but trumped by the Aussie, meaning another push below the 1.20 level on AUDNZD,

EUR: Holding steady for now, having fought against the former dollar tone of the past two weeks, with EURJPY also holding to a tight range. German PPI data in line with expectations at the start of European trading, rising 0.1% YoY.

Further reading:  USD Index: Corrective Pull-back To 83.30/83.50 Within Larger Uptrend (Elliott Wave Analysis)