Pound Faces First Test of New BOE Policy Setup on CPI Data

The British Pound faces its first major data release under the BOE’s new forward guidance framework as July’s CPI report comes across the wires.

Talking Points

British Pound to Interpret CPI Data in Terms of BOE Guidance Framework
Euro May Rise as Pickup on German ZEW Gauge Limits Scope for ECB Easing
US Dollar Looks to Retail Sales Report to Guide Fed QE “Taper” Speculation
Japanese Yen Underperformed on Risk Trends as Nikkei Recovered Overnight

July’s UK CPI report is in focus in European trading hours. Economists expect the headline year-on-year inflation rate to slow to 2.8 percent, down from a 14-month high at 2.9 percent recorded in the prior month. Traders are likely to interpret the data in terms of the new forward guidance framework established by the Bank of England.

This means a soft print may be seen as pushing the central bank’s inflation-linked “knockout” for the commitment to keep rates low further out into the future. A perceived increase in the longevity of accommodative BOE policy is likely to weigh on the British Pound. Needless to say, an upside surprise implies the opposite dynamic. We are looking to be short GBPUSD.

Meanwhile, the German ZEW Survey of analyst confidence is forecast to put the forward-looking Expectations gauge at a five-month high. A firm outcome stands to reinforce recent improvements in Eurozone economic data and limit scope for further ECB easing. This may prove supportive for the Euro as prices continue to track the policy outlook as implied by the front-end bond yield spread.

Later in the day, the spotlight shifts to US Retail Sales figures. Receipts are expected to rise 0.3 percent in July, marking a slight deceleration from the 0.4 percent gain recorded in June. The figure marks the first in a series of high-profile releases due this week that traders are looking to help handicap the likelihood of a Fed move to “taper” QE asset purchases in September. With that in mind, a strong showing stands to be supportive for the US Dollar, and vice versa.

The Japanese Yen underperformed in overnight trade, sliding as much as 0.7 percent on average against its top counterparts. The move tracked a rebound in the Nikkei 225 benchmark stock index, hinting a swell in risk appetite likely bolstered demand for carry trades funded in terms of the perennially low-yielding currency.

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Asia Session:

GMT

CCY

EVENT

ACT

EXP

23:01

GBP

RICS House Price Balance (JUL)

36%

24%

21%

23:50

JPY

BOJ July 10-11 Meeting Minutes

–

23:50

JPY

Machine Orders (MoM) (JUN)

-2.7%

-7.0%

10.5%

23:50

JPY

Machine Orders (YoY) (JUN)

4.9%

2.6%

16.5%

1:30

AUD

NAB Business Confidence (JUL)

-3

–

1:30

AUD

NAB Business Conditions (JUL)

-7

–

-7

Euro Session:

GMT

CCY

EVENT

EXP/ACT

IMPACT