Sterling steady ahead of inflation report

11 May, 2017

Our prop desk has opened a series of short Euro positions in recent hours, whilst long USDCHF trades from earlier in the week are coming good. A long GBPJPY FOREX trade has been closed out at a notable profit in recent hours, whilst an opportunistic long oil trade has also been closed.

There’s a slug of data due out of the UK today with trade balance, construction output and industrial production all on the agenda. The pound has been in reasonable shape so far and the suggestions that the incumbent Conservative party will win the upcoming election by a significant majority is certainly helping here. However this could still change and politics rather than economics could end up being the primary driver for the currency in the medium term.

The Bank of England will issue its quarterly inflation report at 11am GMT, along side the latest verdict from the MPC over interest rates. There’s no expectation of any policy tightening being observed, but there’s some speculation that we could see a more hawkish outlook prevail as the bank looks to manage inflationary pressures that seem set to continue building. The saving grace here may be weaker oil prices and the fact that the pound is finding some support, although the currency remains well adrift of its pre-Brexit levels.

The market may have been expecting a more hawkish outlook from the Reserve Bank of New Zealand last night over its interest rate policy, but this failed to materialise and the kiwi dollar crashed through recent lows against the greenback, before landing at levels we haven’t seen tested in almost a year. The bank’s outlook was arguably all the more surprising given the rampant inflationary print for the quarter, but the expectations are that upside pressures here will be transitory. The currency’s slide in recent months was however flagged by the bank’s governor as being encouraging for trade and given the benefits here, there’s a good argument to maintain the accommodative stance.

Oil prices have been working their way higher in recent hours, with those bigger than expected draws being reported in US inventories yesterday helping offer the market something to cheer. The Opec meeting at the end of the month remains a key marker here, although today’s monthly report by the cartel will be under scrutiny, too. Anything that shows flagging compliance with the quota cuts that were served up at the start of the year will have the potential to unsettle prices in the near term.

US PPI data is slated for release at 12.30pm GMT and although typically a low-level print, this does have the ability to act as an early indicator of inflationary pressures. Any sharp jump higher here could well serve to boost treasury yields and also offer some broad-based support to the US dollar. The DXY dollar index remains below the 100 mark, but anything that suggests the Fed may be pushed into a rate hike at next month’s FOMC – a meeting that Janet Yellen has been keen to remind us remains a ‘live’ one – could see broad based gains for the greenback.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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