CPI Dominates as Sterling Soars, Dollar Tumbles
Inflation data dominates today. While Sterling broke to new 15 year high
and above the whole number 2.0000 psychological level on strong inflation, the dollar weakens after tame core inflation. US Core CPI moderated more than expected to 2.5% yoy in Mar, which is lowest since May 06. Though headline CPI accelerated further to 2.8% on higher energy prices. Housing data from US was slightly better than expected while industrial production missed expectation by dropping -0.2% in March. Neither is providing any support to the greenback.
Earlier today, Sterling soars sharply higher across the board, in particular, with GBP/USD breaking above 2.000 psychological level, heading towards 1992 high of 2.0106 on much stronger than expected consumer inflation data. CPI rose to 3.1% in Mar, breaking through BoE’s target range of 2-3%, which is the first time since BoE was made independent a decade ago. Further more, the older benchmarks, RPI and RPI-X also surged to 4.8% yoy and 3.9% yoy, are rising at their most rapid rate since early 90s.
In accordance with the Bank of England Act in 98, BoE Governor Mervyn King has written an open letter to Chancellor Brown to explain the deviation in consumer price inflation in the month of March. In the letter, King said that part of the CPI’s rise to 3.1% was due to unexpectedly sharp increase in domestic energy prices and rise in food prices caused by a weather-induced global reduction in supply. Also, some of the risks identified by the MPC have started to materialize and those include rebound in spending, continuing rapid growth of money and credit as well as increased capacity pressured.
However, King also downplayed the significant in today’s data as he emphasized that the MPC will continue to “look through the short-term volatility in inflation” which resulted from “fluctuations in domestic energy prices”. “At first sight, news seems unlikely to alter the broad picture painted in the February report”. He indeed expects CPI to fall back within a matter of months and fall to a little below the 2% target by the end of this year, before settling around the target during the following year. But full analysis of the inflation data will be available in May 16’s Inflation Report and May MPC Meeting Minutes.
After all, a hike on May 10 is now like a done deal for the BoE but while some speculations are started today on a 50bps hike, a 25bps hike is still more likely after the open letter. But still, BoE will likely go beyond May and need to have at least another raise in Q3 in order to bring inflation down. With Fed to be on hold this year, that will widen the rate gap to 50bps and this will continue to fuel further rally in Sterling. Meanwhile, the May 16 Inflation Report will be particularly important on what adjustments are to be done in the inflation outlook.
Germany’s ZEW indicator of economic sentiments rose sharply in Apr to 16.5, beating expectation of 10.0 and was the highest reading since last June. Current situation indicate also rose further to 76.9. Eurozone ZEW also rose to 10.7 from 5.1 with current situation indicator rose to 69.9. These data are supportive to ECB’s upbeat economic outlook and further rate hike.
Daily Pivots: (S1) 1.9853; (P) 1.9896; (R1) 1.9938;
Cable rises sharply to as high as 2.0073 today, meeting mentioned 61.8% projection of 1.8517 to 1.9913 from 1.9183 at 2.0046 as well as 100% projection of 1.7047 to 1.9024 from 1.8090 at 2.0067. At this point, further rise is still expected to follow as long as cable stays above 1.9940. Next upside target will be 92 high of 2.0106. Touching of 1.9940 will suggest a short term top is formed and bring consolidation first but it will take a break below 1.9723/26 support to suggest that rise from 1.9183 has topped. Otherwise, further rally is still in favor.
In the bigger picture, rise from 1.8090 is interpreted as having first wave finished at 1.9142, subsequent second wave correction completed at 1.8517. Third wave rally has completed at 1.9913 while the fourth wave correction has already ended with three subwaves down to 1.9183. Current rise from 1.9183 will likely be the final advance of this rise from 1.8090. The channeling property of the terminal points of 1.9142, 1.8517, 1.9913 and 1.9183 is supporting this case.
Having said that, resistance should significantly increase as cable approaches 2.0106 (92 high). With bearish divergence condition still being displayed in weekly RSI as well as daily MACD, risk of medium term reversal will significantly increase. Hence, focus will be on reversal signal as cable approaches this zone. However, a strong break of mentioned 2.0106 resistance will path the way towards 61.8% projection of 1.3680 (01 low) to 1.9554 (05 high) from 1.7047 (05 low) at 2.0677.
Shing-Ip Tsui is the founder and CEO of
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