Forex: Euro, Pound May Not Find Strength in Upbeat CPI and ZEW Data

Talking Points:

Pound May Not Find Lasting Upside Momentum if CPI Tops Expectations
Stronger German ZEW Data Unlikely to Offer Substantial Boost to the Euro
NZ Dollar Gains as the Government Cuts Bond Sale Plans, Projects Surplus

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November’s UK CPI report is expected to show the headline year-on-year inflation rate held unchanged from the prior month at 2.2 percent. Last month’s PMI reports pointed to broad-based price growth acceleration however. Indeed, output prices in the service sector – the largest component of the overall economy – grew at the fastest pace in two-and-a-half years. That opens the door for an upside surprise on today’s reading. Such an outcome may lead the British Pound higher in the near term, but meaningful follow-through seems unlikely.

While a firmer CPI print would probably feed speculation about crossing the BOE’s inflation-based “knockout” threshold – one of the pre-conditions for considering a tightening of monetary policy – the central bank’s recent rhetoric may limit upside momentum. BOE Governor Mark Carney and company have forcefully pushed the idea that the object of “forward guidance” was to decouple improving economic data from policy tightening expectations, underscoring policymakers’ insistence on maintaining an accommodative posture. Furthermore, traders are unlikely to be comfortable with committing to major trend development on any of the major currencies including Sterling before this week’s pivotal FOMC meeting.

Meanwhile, Germany’s ZEW Survey of analyst confidence is expected to show sentiment rose to the highest level in three months in December. The outcome may not prove supportive for the Euro however in that it would offer little reason to suspect the ECB will temper or abandon its easy policy stance. In fact, the improvement in analysts’ outlook may follow-on from last month’s surprise interest rate cut. While monetary stimulus can certainly buoy confidence in the future trajectory of economic growth, it likewise undermines yield-based support for the exchange rate. In fact, a revised set of Eurozone CPI figures is expected to show the year-on-year inflation rate held below 1 percent for a second month in November, bolstering the case for a dovish ECB for the time being. We remain short EUR/USD.

Most major currencies were little-changed against the US Dollar overnight trade. The New Zealand Dollar outperformed, rising as much as 0.4 percent against its leading counterparts. The advance followed after the country’s Debt Management Office said it expects budget surpluses starting from FY2014-15 and reduced its expected bond issuance for the 2013-14 period. Finance Minister Bill English added that the government plans to begin repaying its debts early and echoed recent comments from the RBNZ, saying the central bank is likely to raise rates next year.

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Asia Session:

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RBA December Meeting Minutes

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6:00

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15.4%

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15.4%

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