Foreign Exchange News
15 October 2013

UK Inflation Figures May See Further GBP Weakness

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EUR/USD 1.3562
GBP/USD 1.6003
GBP/EUR 1.1799 (0.8474)
EUR/CHF 1.2340
GBP/CHF 1.4516
GBP/AUD 1.6765

Columbus Day in the US yesterday saw equity markets open but bond markets closed, it was also Thanksgiving in Canada with several other bank holidays globally keeping markets subdued. Nervousness surrounding the impending debt ceiling and on-going budget talks in the US were also reasons investors steered clear of jittery markets in the hope that some clear resolution can be found.
On the day the USD traded lower as markets began to position themselves for the possibility of a US default. We still maintain this is a very unlikely course of action from the US, but it is an outcome markets will have to position for – a default caused by political impasse is still a default. Whilst the USD looked like markets were positioning for a negative scenario, US equity markets found themselves in the green, this may be hope for a resolution or simply an acknowledgement of what we are likely to see QE continue into the new year if this continues for much longer without resolution.
We have spoken about the recent weakness in GBP, weak PMI figures and last week’s weak production data put the pound under some further selling pressure but the retracement thus far has been relatively mild, considering the bull run brought it from 1.4800 in July to highs above 1.6250 towards late September/early October. The BOE have been consistent in their views that they see rates remaining low until 2016, however real market rates suggest otherwise, pricing in a rate increase well before.
This puts the pound in a vulnerable position, if the market is too confident about the UK recovery there is plenty of more scope for GBP to depreciate, however, should the BOE be forced to alter their plans or if conditions warrant an earlier increase in rates then the pound may well have further room to improve. On this measure today’s inflation data should provide some guidance.
The BOE have been facilitating above target inflation for a number of years now but have insisted that the rate will fall back towards their 2% target in the latter half of 2013 and into 2014. Analysts expect todays reading to fall back to 2.6% from 2.7%, with monthly inflation rising just .3%, versus .4% previously. This may well see the pound under some further selling pressure but should inflation exceed expectations we may just see GBP rally.
The Eurozone has been enjoying its time out of the limelight, for once political concerns causing a global slowdown are not at their feet although it’s still a real concern for them. Finance ministers met yesterday to discuss the economy, the banking union and various rescue programs. According to the Eurogroup president Dijsselbloem both Ireland and Spain are on course to exit their respective programs, optimistic talk based on a fragile recovery. However, a less optimistic tone surrounded Greece, with no support for further haircuts the indebted nation will likely have to return for support later in the year.
Data wide today remains relatively quiet, with the US still in shutdown mode most data releases are on hold for now leaving us to look towards Europe for economic drivers. The German ZEW sentiment survey is due this morning, the Eurozone reading hoping to surpass last month’s reading of 58.6.

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