AUD Rallies on CPI, Sterling Awaits GDP with History Against It

The Australian dollar rallied to a fresh record after inflation surged in the first quarter to give Aussie bulls reason for possible tightening ahead. Meanwhile, the pound is settling into a range ahead of Wednesdays GDP data. The average miss in UK GDPs for the past two years has been 0.5 percentage points. Will we see a second consecutive quarter of negative growth ie the return to recession?

AUD/USD jumped 50 pips to a record 1.0851 after a 1.6% quarterly rise in the CPI compared to the 1.2% expected. Rising inflation could eventually force the RBA to hiking rates but the market reaction wasnt overly enthusiastic. After the initial rise, AUD/USD gave back about half its gains in a sign that 11-cent rally since March 15 may be growing tired. The trimmed mean, which measures core inflation, rose 0.9% compared to the 0.7% expected. Price rises werent confined to a particular sector as education costs jumped 5.7%, transportation rose 2.7% and health care increased 3.9%.

The yen also slumped after Japanese retail sales fell 8.5% y/y in March compared to the -6.1% expected. Consumer spending will continued to be squeezed following last months earthquake. USD/JPY climbed 30 pips after hitting a one-month low on Tuesday. A slumping economy magnifies the risk of currency intervention to boost USD/JPY.

The New Zealand dollar rallied above 0.81 after business confidence rebounded to 14.2 in April from -8.7 last month.

UK first quarter GDP is the highlight of the European session. The consensus is for a 0.5%-0.6% quarterly rise after a 0.6% contraction in Q4 2010. The average miss for the past two years has been 0.5 percentage points. Its unlikely but a second consecutive quarter of negative growth would push the UK back into an official recession. A positive reading is expected because poor weather and a trough in construction were the drivers of the Q4 negative print. There is also talk of an upward revision to Q4 because official figures often underestimate growth after a recession.

Ahead of the release, cable is bounded by the 1.6431 - 1.6533 range but those levels are unlikely to mount significant support/resistance following the release. The slumping dollar also complicates the trade. The impacts will be felt in a clear and sustained way on the EUR/GBP cross. A poor reading (+0.3% or lower) will drive EUR/GBP toward the Oct. high of 0.8940. A breach of that level would open the way to 0.9150 (spot currently at 0.8900).

By AB AshrafLaidi.com Staff