GBP/USD Outperforms As Rate Hike Speculation Resumes

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Top Stories

  • Sentence - BOE understates inflation risk
  • EU CA widens to more than twice the estimate
  • Nikkei up 0.26% Europe flat
  • Oil drops below $85/bbl to $84.57/bbl
  • Gold at $1378/oz.

Overnight Eco

  • NZD Business NZ Manufacturing Index 53.7 vs. 53.2
  • NZD PPI Input q/q 0.9% vs. 0.9%
  • NZD PPI Output q/q 0.2% vs. 0.9%
  • CHF ZEW Economic Expectations n/a
  • EUR Current Account -13.3B vs. -5.1B
  • GBP CBI Industrial Order Expectations n/a

Event Risk on Tap

  • CAD Wholesale Sales m/m expected at 1.9%
  • USD Core CPI m/m ecpected at 0.2%
  • USD Unemployment Claims expected at 401K
  • USD CPI m/m expected at 0.4%

Price Action

  • USD/JPY holds above 83.50 very flat
  • AUD/USD runs into resistance at 1.0050
  • GBP/USD 1.6150 in view post Sentance
  • EUR/USD 1.3600 rejected as it trades back to 1.3550

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A very choppy night of trade in the currency market with risk FX bounded by relatively tight ranges as traders struggled for directional clues during a session essentially void of any major event risk. The EUR/USD bounced between the 1.3550-1.3600 level as EU Current Account deficit widened to more than twice the market estimate while cable received a boost from the predictably hawkish Andrew Sentance who argued that the BoE was underestimating inflation risks. Meanwhile Aussie was well bid in the wake of relatively upbeat speech by RBA Assistant Governor Phillip Lowe.

In Europe the Current Account printed at -13.3 Billion versus -5.1 Billion eyed. For the year as whole, the CA deficit widened slightly to -56.4 Billion from 51.4 Billion the year prior. Overall the deficit remains relatively small at only 0.6% of the GDP and the data had little lasting on euro trade as traders generally ignored the news. Some currency market participants were also puzzled by the sharp spike in the borrowing of ECB marginal lending facility which increased to 16 Billion euros. This was the highest amount since June of 2009, however most analysts attributed the rise to technical factors rather than sudden the sudden collapse in liquidity.

In UK meanwhile MPC member Andrew Sentance was characteristically hawkish noting that BoE estimates on inflation were too optimistic as he made the case for a preventative rate hike that would "bring inflation back to target." Sentence also noted that the BoE has allowed pound to fall too far stoking further inflationary pressures in the UK economy. His remarks helped to lift sterling by nearly 50 points in mid-morning London trade, but Mr. Sentance's views are well known and remain in the minority on the MPC. Furthermore he is due to leave the policy committee in May and today's unabashedly hawkish rhetoric may have been an attempt to spur UK policymakers to last minute action before he exits the global stage. Nevertheless we believe that the BoE will remain stationary for at least another two meetings as it looks for confirmation of growth in the UK economy and cable will therefore be capped at the 1.6300 level for the time being.

In Australia Assistant Governor Phillp Lowe provided a generally hawkish view of 2011 noting that global inflationary pressures are likely to persist for the rest of the year. Mr. Lowe upgraded his view of inflation from 2.5% to 3.0% while forecasting a strong rebound in Australian growth to 4.25% rate by the 2nd quarter of the year as the country recovers from weather related problems of Q1. Governor Lowe's remarks offered some support to the Aussie which has been hurt recently by the assumption that the RBA will remain stationary on rates for the majority of this year. Aussie held its ground comfortably above parity as traders took Mr. Lowe's optimism to heart.

In North America today the focus will turn to US CPI numbers and weekly jobless claims as traders try to gauge trends in both inflation and growth. Yesterday's higher than expected core PPI reading spurred speculation that US inflationary pressures may be escalating. Meanwhile jobless claims are expected to pop back above the key 400K barrier. However if the labor data surprises to the upside it could be the catalyst to push USD/JPY above the psychologically important 84.00 figure - something it failed to do in yesterday's trade. Finally the currency markets will also focus on chairman Bernanke' s testimony at 15:00 GMT as they look for any suggestion that the Chairman has upgraded his view of the US economy.

FX Upcoming

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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