Intraday Market Thoughts

UK CPI highest since '08; Onto US Housing & IP

by Ashraf Laidi
May 17, 2011 13:14

GBP bounces off the lows after highest inflation reading since 2008, EUR supported by agreement to provide aid to Portugal. EURUSD still in a downtrend and far from turning bullish.

USD is little changed against most other currencies with the exception of GBP and JPY. GBP is once again supported by higher then expected inflation figures. UK CPI year over year came out at 4.5%, higher then expected 4.2% and up from the latest 4.0% (core 3.7% vs. 3.4%). Month over month CPI saw a print of 1%. As a result, GBPUSD jumped to 1.6307 but has met selling pressure and has retreated back pre-announcement levels at 1.6260. This reading is the highest since October 2008.

See Ashraf's long & short strategies for GBPUSD in yesterday's Premium insights

Bank of Englads governor Mervyn King in his Inflation Letter blames higher readings on VAT increase, high energy and import prices and sees further rise in CPI in coming months.

Euro has gained slightly against the greenback after European finance ministers agreed to provide 78B Euro aid package to Portugal. This aid has to be approved by all EZ countries. Euro is holding at session highs, currently at 1.4210 and that is despite the disappointing German ZEW economic sentiment index that came out at 3.1 much worse than previous 7.6. Market expected 4.8. This result is the worst since February and marks four months of gradual worsening in sentiment.

News releases published during the upcoming US session will include building permits that are expected unchanged at 0.59M and housing starts that are expected to improve slightly from 0.55M to 0.58M. These releases are published at 8:30 am EDT.

As QE2 is coming closer to its end, any indicators that can be used to gauge future inflation will become more closely watched. At 9:15 am EDT capacity utilization and US INDUSTRIAL PRODUCTION will be released. Capacity utilization has been slowly but steadily increasing since July 2009 and market expects another improvement from 77.4% to 77.7%. Generally, it is assumed that only move over 80% would start to create inflationary pressures. Industrial production is expected to worsen from 0.8% to 0.5%. It is however important to keep in mind that this indicator is very volatile.

Kiwi traders will be waiting for PPI q/q numbers coming out at 6:45 pm EDT. Market expects a decrease from 0.9% to 0.6%. Price action has been decidedly negative so any downside surprise is likely to punish NZD strongly.

by PU - staff


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