Euro May Fall on Soft CPI, Pound Risk on the Upside After UK GDP

Talking Points:

Euro may fall while risk appetite firms as soft CPI boosts ECB easing bets
British Pound may be more sensitive to upbeat UK GDP vs. disappointment
NZ Dollar rebounds after RBNZ-driven drop, Aussie gains on RBA outlook

The preliminary set of January’s German CPI figures headlines the economic calendar in European trading hours. The headline year-on-year inflation rate is expected to edge slightly higher, registering at 0.4 percent compared with 0.3 percent in the prior month. Leading survey data points to the slowest pace of price growth in 11 months however. Furthermore, realized Euro-area economic data outcomes have increasingly underperformed relative to expectations in recent months.

This paves the way for a downside surprise, stoking bets on an expansion of ECB stimulus measures at March policy meeting. Such a result is likely to boost risk appetite, particularly after the Fed conspicuously withheld signaling a dovish revision to its posture in response to recent market turmoil. This is likely to bode well for the sentiment-geared Aussie and Kiwi Dollars while weighing on the Euro and punishing funding currencies like the Japanese Yen.

UK GDP figures are likewise on tap. Expectation point to a slight pickup in the pace of economic growth showing output added 0.5 percent in the fourth quarter compared with the three months through September 2015. Recent news-flow has increasingly underperformed relative to consensus forecasts however, warning that analysts’ models may be overstating the economy’s vigor and opening the door for a downside surprise.

Priced-in BOE policy bets have dramatically deteriorated in recent weeks, with traders no longer expecting a hike in 2016. The British Pound has dutifully declined against this backdrop, suggesting the currency may prove relatively resilient to a disappointing print that reinforces what has already bled into the exchange rate. Alternatively, an upbeat print that clashes with the status quo may inspire an outsized positive response from the UK unit.

Most major currencies were confined to quiet consolidation ranges in overnight trade. The New Zealand Dollar outperformed in move that appeared corrective after the currency’s sharp drop following the RBNZ rate decision, where Governor Graeme Wheeler hinted at further easing on tap this year. The Australian Dollar also edged higher, rising alongside local bond yields to suggest that residual upside pressure following yesterday’s firm CPI data may have been unleashed by the passing of the FOMC policy announcement.

Where do we see Euro and British Pound going in 2016? See our Trading Guides to find out!

Asia Session

GMT

CCY

EVENT

ACT

EXP

20:00

NZD

RBNZ Official Cash Rate

2.50%