After a relatively quiet start to the week yesterday markets are likely to pick up considerably today when important UK and US data is released. The UK Consumer Price Index print will give a good indication of the future direction of inflation in Britain whilst the US Advance Retail Sales figure will be used as a gauge of private consumption performance in the United States.
In light of the Bank of England’s forward guidance statement last week, the trajectory of British CPI inflation is extremely important for traders of the Pound. The BoE said that if inflation remains above 2.5% in 18 months time then it will raise interest rates. If interest rates are hiked then demand for the Pound will soar, as the potential return available to holders of Sterling will improve.
The Consumer Price Index has printed above 2.5% in 8 of the past 9 months and is currently significantly higher at 2.9%. The BoE predicts that inflation has peaked and will begin to cool down later this year; indeed, CPI is expected to have declined modestly in July to 2.8%. A result of this kind is likely to hurt the Pound against the US Dollar, whilst a weaker-than-expected score could seriously derail Sterling’s recent rallies. However, if CPI prints at 2.9% again, or if it is reported that inflation actually accelerated last month, then it is entirely likely that investors will push forward their bets of an interest rate hike from the BoE and this could lead to further gains for GBP/USD.
Later on in the day the US Advance Retail Sales print is set for release and it is expected to show that consumption increased by 0.3% in July. This would mark the fourth consecutive month of growth in the sector. Retail Sales figures are hugely important for the US Dollar because private consumption accounts for around 70% of American economic output, and is therefore an influential barometer of financial performance.
A score of 0.3% or above could play into the US Dollar’s hands by boosting bets of a Fed taper. With US CPI inflation set to rise from 1.8% to 2.0% later this week and the University of Michigan Confidence index also expected to show improvement the ‘Greenback’ has enjoyed a miniature renaissance so far this week and this phenomena could accelerate further if Fed taper speculation continues to proliferate.
Fed asset purchases are seen to devalue the Dollar by driving investors out of the currency in search of higher yields.
The Pound to US Dollar exchange rate declined by around half a cent from 1.5510 to 1.5460 yesterday. Technical resistance for GBP/USD exists at 1.5500 and 1.5606, whilst technical support is in place at 1.5434 and 1.5250. A robust UK CPI inflation print is likely to be overshadowed by a strong US Advance Retail Sales print of the same veracity, because markets know that the Federal Reserve plans to taper asset purchases way before the Bank of England intends to hike the benchmark interest rate.
Data releases in Europe this morning are predicted to show that for the first time in two years the currency bloc posted positive growth during the second quarter. However, with the European Central Bank concerned with weak credit growth in the Eurozone, and with Unemployment catastrophically high at 12.1%, meagre GDP expansion of 0.2% is unlikely to give the 17-nation bloc much to cheer about. Fears that the ECB is about to unleash a new liquidity-boosting programme are currently holding the single currency back against the Pound and the US Dollar.
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