Markets await US CPI figures following recent volatility

Tom Tong13/May/2011Currency Updates

GBP

Thursday saw the pound retreat as NIESR (National Institute of Economic and Social Research) GDP estimates and manufacturing and industrial production figures reflect budget cuts.

Interest rate expectations for the British pound are still weak. Currently 39 basis points’ worth of hikes are priced in over the coming 12 months, unlike the euro which is able to compensate for its sovereign debt troubles with a competitive (and still rising) yield, the pound is simply left to its fundamental troubles.

We were reminded of what austerity can do yesterday when the NIESR GDP estimate for April slowed to 0.3% expansion and industrial production posted a similarly weak rise.

There is no significant UK data scheduled for release today.

USD

CPI stats to determine whether rate expectations should rise

Through much of Thursday the dollar was gaining ground, hitting a six week high against the euro but a pickup in risk appetite overnight prevented the currency from cementing its bullish drive.

Risk trends are the most immediate catalyst for volatility; but we may also see yield expectations generate significant waves for the greenback. Philadelphia Fed President Plosser offered a complimentary hawkish voice to Kocherlakota’s rhetoric the day before. The central banker projected 3 to 3.5% growth in 2011 and 2012 while also forecasting unemployment to hover around 7 to 7.5% by the end of 2012. What rate watchers were really interested in though were his suggestions that the Fed “must be prepared” to act “aggressively” and that he expects tightening in the “not-too-distant future”. It is important to realize that this is still a minority voice amongst policy officials; but it is starting to pick up steam. Potentially far more effective at stoking interest rate speculation is Friday’s CPI data for April. The consensus forecast of a 3.1% annual pace of inflation would push price pressures well outside the central bank’s comfort zone.

Friday’s Key US Data includes core CPI, University of Michigan (UoM) Consumer Sentiment and Preliminary UoM Inflation Expectations.

EUR

Euro will be reminded of the growth implications of austerity efforts.

The euro’s future is in disarray. Yet, that doesn’t seem to dissuade the market from keeping the currency elevated in the face of ever-more prolific concerns.

Fundamental concerns continue to be put off by speculative traders taking advantage of returns that can be made today.

However, problems will catch up to the market eventually with directly contrasting views for monetary policy within the EU. German Chancellor Merkel says Greece will not be offered further accommodation on its bailout program until it was clear that the country is on track to trim its deficit, while Finland seems willing to support the Portugal bailout package only if the troubled country sells assets and it is given an explicit guarantee that it will it will be paid out first in the event of further strain.

Additionally, Irish officials are demanding equivalent accommodation on its emergency loans should Greece be shown favour and governments for all three ‘rescued’ nations seem ready to flaunt the restructure or withdrawal cards.

In the meantime, we may see data that both questions the market’s confidence in the euro and reminds of the steep cost that is paid for austerity.

The initial round of preliminary European GDP with figures were released early this morning with Germany posting 1.5% Q/Q (was expected at 0.9%) and France 1.0% (expected at 0.6%), suggesting that rate expectations will remain elevated and the market will be more resilient to disappointing figures from the periphery.

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Written by Tom Tong

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