Market awaits UK Inflation data

Tom Tong18/Oct/2011Currency Updates

EUR

Eurozone euphoria was brought to an abrupt end yesterday as Steffen Seibert, spokesman for German Chancellor Angela Merkel, suggested that the forthcoming European Union summit meeting will not magically make the Eurozone’s problems go away. That provoked traders to switch out of the European common currency and led to a strong day for the US currency. Asian stock markets also tumbled in early trading, as the German leaders warned that a comprehensive solution to Europe’s debt crisis may not be near. The euro, which had rebounded on foreign exchange markets last week as hopes rose of a “silver bullet” for the region’s escalating debt crisis, fell back in afternoon trading yesterday.

Proposals to beef up Europe’s bailout fund by offering to guarantee portions of the debt owed by the region’s weaker governments threaten to ruin France’s top credit rating. The nation’s 10-year notes are the third-worst performers this quarter — behind only Greece and Belgium — as traders speculate the European Financial Stability Facility will be used to insure the first portion of losses in the event of a sovereign default. France’s rating is under pressure.

GBP

Sterling remained down against the U.S. dollar on Monday, with further volatility expected against the euro and the greenback today with the release of UK Consumer Price Index (YoY). This data is key as CPI indicates the price movements by the comparison between the retail sales prices of shopping basket of goods and services purchased and as the movement of GBP is driven by inflation, the Consumer Price Index therefore measures what direction the UK economy is going.

Sterling will also see continuing movement against the euro as the knock on effects regarding the meeting to solve the euro zone debt crisis is not expected to have any development this week following an announcement from Germany’s finance minister Wolfgang Schaeuble, as European leaders are struggling to meet the one-week deadline for a cohesive plan to put a solution in place.

Increasing negative news out of the UK has put further pressure on the British economy as the latest House Price survey has seen the annual increase in house prices begin to decelerate. This, along with independent forecaster Ernst and Young declaring the economy has come to a dangerous junction, will put added weight on the shoulders of BoE as the new quantitative easing measures due to be introduced look uncertain to boost recovery and increase consumer confidence.

USD

Policy makers at the Fed are voicing conflicting opinions on the future monetary policy. Hawkish opinions, although inflation still a threat, should be seen to ease over the next few months and so no added stimulus is needed at this point in time.

The flip side of this is that a temporary rise in inflation may have to be accepted to reduce the high unemployment levels currently seen across the pond and the Fed should look to buy more bonds to reduce long term rates.

U.S. stocks saw the biggest fall for two weeks from the initial early rise after the German finance minister said that we will not see a “definite solution this weekend.” The dollar also fell after the Chinese growth data showed the economy slowed in Q3.

Market data out today in the U.S. includes PPI, TIC flows and Bernanke’s speech later in the day where we expect to see a further indication on Q.E. thoughts.

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Written by Tom Tong

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