Headlines
UK inflation report on tap –
CPI tipped to remain at zero.
GBP/EUR flat –
Eurozone trade surplus swells on weak Euro.
GBP/USD down 60 pips –
Traders hope for fresh Fed guidance on Wednesday.
Pound softens ahead of inflation numbers –
Fears of return to disinflation.
Sterling
Jittery traders opted to sell the Pound versus most of the majors yesterday afternoon to hedge against the possibility of a negative print in this morning’s key UK CPI report. Analysts are primed for the headline inflation index to remain at 0.0% for the second month in a row, which would mean that over the past six months price pressures have remained stagnant. However, there is a possibility that the rotten mood in the commodity sector could have translated into disinflation in Britain. If this proves to be the case the Pound could suffer as Bank of England rate hike projections are pushed back. Conversely, underlying rising wage pressures could have boosted the CPI rate in July, which would probably bolster demand for Sterling.
Euro
The Pound to Euro exchange rate remained flat throughout most of yesterday’s session as traders paused for thought ahead of this morning’s UK inflation data.
The only blip on the GBP/EUR graph came during the morning when comments from Bank of England policymaker Kristin Forbes hit the newswires. The BoE official mused on the potential pitfalls of leaving monetary policy low during a time of swift growth, which bolstered the appeal of the Pound. But Forbes opted to temper these remarks with cautionary comments on the deflationary impact of the stronger Pound, collapsing commodity prices and currency intervention in China.
A report yesterday indicated that the Eurozone’s trade surplus increased from €16.0 billion to €26.4 billion in the 12 months to June, which was seen to suggest that the weaker Euro is helping to make export firms within the bloc more competitive. Exports ticked higher by 12% whilst imports improved by 7%.
US Dollar
Investors who attempted to drive Sterling higher against the US Dollar were thwarted yesterday and GBP/USD eventually weakened by around 60 pips as worried Sterling traders sold up ahead of this morning’s British inflation report.
Data across the pond suggested that New York manufacturing firms suffered their worst month of output in July since the middle of the financial crisis in 2009. The dismal print saw the index plunge from +4.75 to -14.92 but investors were happy to dismiss the regional report and wait for the more reliable nationwide report to pass judgement. If manufacturing output across the nation sinks to its lowest level since 2009 – which it almost certainly won’t – then the likelihood of a Federal Reserve rate hike in September will significantly decrease.
On Wednesday evening the Fed is set to release the minutes report from its latest meeting. The beef of the announcement is unlikely to yield much volatility because the meeting to which the minutes correspond took place before last week’s melee of central bank interventions in China. However, markets will be listening with eager ears to hear if Fed officials opt to comment on the implications that the potentially deflationary Chinese measures could have on US monetary policy.
If the out-dated minutes report is sandwiched between some China-related central bank rhetoric then we could see large moves in GBP/USD – this could see the Pound rise above technical resistance if the Fed expresses caution or lead to a sharp Sterling depreciation if policymakers continue to talk up the prospect of tightening in September.
Canadian Dollar
The Pound rallied by around 150 pips against the Canadian Dollar yesterday but the ‘Loonie’ embarked on a remarkable recovery during the North American session to leave the pair even on the day as this morning’s UK CPI report came into focus.
There are no key Canadian ecostats on the calendar this week until Friday when retail sales are tipped to decelerate from 1.0% to 0.2% and inflation is expected to rise from 1.0% to 1.3%. Considering the dire state of the commodity market it is unlikely that the Canadian Dollar will garner much support even if July’s CPI figure does match the median market forecast. This is because recent events across the globe, most prominently in China, will probably lead to further dips in Canadian consumer prices over the next few months.
Australian Dollar
Profit taking took the Pound lower by over a cent against the Australian Dollar yesterday. Although the dud US Empire State manufacturing index was generally viewed as market noise rather than a strong sell signal it seems that traders accelerated their buying of the ‘Aussie’ Dollar following the report, most likely in the hope that it will persuade the Federal Reserve to hold back on tightening monetary policy in September.
New Zealand Dollar
The Pound rose to within 80 pips of a fresh six-year high against the New Zealand Dollar yesterday morning but a mixture of profit taking, concerns regarding this morning’s UK CPI report and hopes of an uptick in dairy prices took the pair lower by around 230 pips during the London session.
Data Released Today
09:30 GBP Consumer Price Index (YoY) (JUL) High 0.0%
13:30 USD Building Permits (MoM) (JUL) Medium -8.0%