UK inflation could be stickier than the BOE forecasts

The latest price data out of the UK was somewhat contradictory. The annual headline rate of price gains fell to its lowest level since November 2010 at 3.4% in February, however the monthly rate jumped by 0.6% and both the monthly and annual rate were above expectations. This suggests that the Bank of England can’t get complacent about price pressures in the UK as inflation may prove to be stickier than expected.

This is an important point. The Bank has pegged its policy trajectory (to keep monetary policy loose for a long time) on its belief that inflation will fall back sharply in the coming months. Likewise, weakening inflation could also hurt the growth outlook for the UK as high prices have been blamed for dampening consumption and hindering a robust and sustainable economic recovery post 2009.

But where does this leave the pound? On the one hand sticky inflation makes more QE less likely, which should be supportive of the pound. But on the other hand higher prices could constrain growth, so this is likely to keep sterling range bound for some time. In the short term, however, the pound has been extremely strong, rising above its 200-day sma yesterday as the dollar came off sharply. The 200-day sma is 1.5859 – which is now acting as support. It is slightly concerning for pound bulls out there that GBPUSD didn’t make much traction above this level, and indeed around these major levels price action can be fairly sticky. If we don’t see the pound take off from here then GBPUSD may start to fade around this level. In the short-to-medium term the key range to look out for is 1.60 on the top side and 1.57 – a cluster of daily smas – on the downside.

It’s been an interesting day with some unusual drivers of price action. This started with comments from President of BHP Billiton’s Iron Ore department who said at a mining conference in Perth that Chinese demand for steel and ore would undoubtedly slow along with the trajectory for economic growth. Since China is Australia’s largest trading partner these comments hit sentiment towards the Aussie dollar. It has continued to fall sharply throughout the European session, although it is finding support just below 1.0500 where it starts to look oversold based on the 30-minute RSI chart. The Aussie is very weak within its recent range. In the next few days if we see the greenback make up for recent losses then this pair is extremely vulnerable, but good resting support comes in at 1.0380 – a cluster of daily moving averages.

Interestingly, the head of Rio Tinto, another mining giant, also spoke at the same conference and sounded more upbeat about the outlook for China, but the markets seemed to dismiss his comments.

The other thing to note this morning is that reports of protests and gunfire have been coming out of China. However, these claims are unsubstantiated and some photos “live” from the action appear to be doctored. However, the recent ousting of Party official Bo Xilai on corruption charges suggests that there could be a potential power struggle at the top of the politburo. Just how serious this is we don’t know. As a colleague pointed out to me earlier, heightened security in Beijing is not uncommon. As to why the Hang Seng and the Shanghai Composite index fell more than 1% today, it could be down to the largest increase in gasoline and diesel prices for 33 months.

China keeps a tight grip on energy prices as refiners are state controlled. However, to stem large losses at the refineries this price increase was deemed necessary as oil prices rise sharply. This could hurt inflation figures going forward, and may keep the Chinese authorities wary about loosening policy too much in the absence of a major economic shock.

Europe also hit the headlines, although in recent weeks news from the currency bloc has taken a back seat. Spain sold 1 and 2-year debt, and although it didn’t quite meet its target of EUR 5.5bn (it shifted EUR 5.05 BN) yields on the debt fell sharply. However, 10-year Spanish bond yields have been drifting higher in recent days and remain at the top of their range. Italian yields are also higher today, although they have fallen sharply recently and may be due a bit of a pullback. We are at an interesting time for the sovereign debt crisis. The situation has undoubtedly stabilised, and the market seems to be accepting that Greece may need more help in the future, however bond traders are unlikely to loosen the rope too much more than they already have for Spain and Italy until they get either 1, an improvement in the growth figures as we move into the second quarter of the year or 2, debt levels start to improve showing that austerity measures are working. We believe that as we move into the second quarter the Eurozone debt crisis is at a more critical stage as the markets wait to see results of fiscal consolidation and its impact on debt targets.

Looking ahead today the markets are a bit jumpy. The dollar is regaining some of yesterday’s losses and stocks are lower. The Apple fuelled jump in US stocks was only temporary and today futures suggest that US markets are poised to open lower.

Ahead today all eyes will be on US housing data and also on a lecture given by Ben Bernanke at George Washington University at 1645GMT. Yesterday New York Fed President Dudley stressed the US economy was not out of the woods yet, however he didn’t use this speech as a way to slam the recent rise in yields and cause the US Treasury market to revert to its recent move lower. This suggests that the Fed finds the recent upswing in yields acceptable as long as yields don’t surge too high or become too volatile. Thus, we expect yields to meander higher and for the dollar to regain some of its recent upward thrust in the short-term.

Источник: Forex.com

20.03.2012