Daily Report: Sterling Firm as Markets Await Inflation Data

Sterling is firm and pressing recent high of 1.6343 against dollar as markets await inflation data from UK. Markets expect CPI to jump further away from BoE's target to 4.2% yoy in February while core CPI is also expected to climb to 3.1% yoy. This will be more than double of BoE's target of 2%. Currently, markets are expecting BoE to raise rates from the record low of 0.5% as early as in May, with full pricing of hike before August but this is far much less certain that ECB's April rate hike expectation. Today's CPI data and tomorrow's BoE minutes will be important in rate expectation and thus the outlook in pound in near term. In particular, these two events will decide whether GBP/USD could break through 1.6343 decisively and whether EUR/GBP could reverse from the current trend line resistance level.

 

ECB's hawkish chorus continued this week and indicated that Japan's earthquake won't deter the timing of rate hike from the bank. Executive Board member Tumpel-Gugerell said that "risks to medium-term price developments are tilted to the upside... and against this background, strong vigilance is, of course, necessary and we are monitoring the situation closely. Governing Council member Mersch said that "the board of governors remains ready to react in a resolute manner and at the opportune time to avoid heightened risks materializing and weighing on the stability of medium-term prices and... great vigilance is called for, with a view toward containing the heightened risks to price stability. Both mentioned the famous word "vigilance".

 

Japan Finance Minister Noda reiterates that based on the agreement on join intervention made last week, G7 countries will "monitor exchange markets closely and will cooperate as appropriate". And so far, Noda hailed that the joint move was "significant for stability in the markets.

 

One the data front, Japan all industry index rose 2.9% mom in January. Swiss trade balance, UK CPI, public sector net borrowing, CBI trends orders will be released in European session. Canada leading indicators, retail sales and US house price index will be featured in US session.

 

Dollar index remains weak and current decline is still in progress for near term target of 100% projection of 78.87 to 76.13 from 77.38 at 74.64 and then 2009 low of 74.19. On the upside, above 75.73 minor resistance will turn bias neutral and bring recovery. But outlook will remain bearish as long as 77.38 resistance holds. The greenback should remain generally weak.

 

 

Daily Pivots: (S1) 1.6232; (P) 1.6279; (R1) 1.6356; More.

GBP/USD rises further to as high as 1.6326 so far and intraday bias remains on the upside for 1.6343 resistance. Break there will confirm that whole rise from 1.5343 has resumed and should target 61.8% projection of 1.4230 to 1.6298 from 1.5343 at 1.6621 next. On the downside, below 1.6203 minor support will flip bias back to the downside for another fall to extend the consolidation from 1.6343. But after all, downside should be contained by 1.5962 cluster support (38.2% retracement of 1.5343 to 1.6343 at 1.5961) and bring rebound.

 

In the bigger picture, price actions from 1.3503 (2009 low) are treated as consolidation to long term down trend from 2007 high of 2.1161. Rise from 1.4230 is treated as the third leg of such consolidation and with 1.5343 support intact, such rise could still continue for 1.7043 resistance. But after all, strong resistance should be seen between 1.7043 and 50% retracement of 2.1161 to 1.3503 at 1.7332 to limit upside. On the downside, break of 1.4230 support will be the first signal of down trend resumption and will turn focus to 1.3503 low for confirmation.