Global Themes

  • Brace for inflation at 9:30am
  • Dollar recovery fails
  • Swedish bank to hold rates?

GBP

Brace for inflation at 9:30am

A lively calendar of economic data from the UK docket today could shake up Sterling currency pairs. The most significant is UK Consumer Price Index (CPI) released at 9:30am, which could help pave the speculative path of future rate hikes in the UK. CPI is expected to moderate to 2.9% in January, a notch lower than December’s 3% y/y and soften to -0.6% from 0.4% m/m. Core inflation, which excludes volatile elements like food and energy prices is in fact forecast higher at 2.6% from 2.5% y/y.

Should inflation figures surprise to the upside, this could boost the pound today and help fuel a Sterling march towards the psychological $1.40 against the US Dollar and €1.14 against the Euro. GBP/USD looks to have found near term support around the $1.38 handle and GBP/EUR appears stable above €1.12. However, if inflation figures disappoint, a break below these key supports could expose a downside acceleration towards €1.11 against the Euro and perhaps even $1.36 against the USD.

  • For now, Sterling is still struggling to gain any significant upside traction after the lost ground from last week’s Brexit jitters. The risks for the pound could increase further over the near term as Prime Minister Theresa May is expected to reveal her ‘Road to Brexit’ which should outline her vision of the UK’s exit from the European Union (source: Reuters). A series of six speeches over the next couple of weeks start with Foreign Secretary Boris Johnson on Wednesday. On Saturday, Mrs May is expected to deliver her first of two speeches which should hopefully provide some clarity and help unify her feuding cabinet. Market participants should be prepared for some heightened volatility.

USD

Dollar recovery fails

The US Dollar index is up around 1% this month but has failed to hold above the 90 level. Increased global market volatility caused a spur of panic buying, with some market participants opting for the dollar as a safe haven. Now as equities have seemingly stabilised, investors may reduce their risk-off approach by closing positions. As a result of recent moves, EUR/USD has fallen over 2.5% this month with a quick sell-off, only managing to break back above the $1.23 level this morning. EUR/USD has been stuck in a 3-cent range since the beginning of January, with traders finding comfort between $1.22-$1.25.

Market participants have cooled greenback positions ahead of the inflation figure tomorrow. US equity moves have been attributed to fears over inflation and this Wednesday's figure could spur another round of speculative moves. A higher inflation print could prompt the Federal Reserve (Fed) to tighten policy faster than expected, but if they fail to act quick enough it could have the opposite effect, pushing up long-term bond yields (source: Reuters).

  • Looking ahead, market participants will pay attention to newly elect Fed Chairman Jerome Powell’s congressional testimony at the end of the month, 28/02, to assess the tone of the speech and any hints of policy changes.

SEK

Swedish bank to hold rates?

The Riksbank will meet tomorrow morning at 8:30am to discuss its interest rates. The Central Bank has left the key policy unchanged at -0.50% since February 2016. With the Swedish economy close to its 2% inflation target and unemployment continuing to fall there is a good case for the bank to raise interest rates out from a negative position. However, according to Reuters there is only a 16% chance of a rate hike, with market participants expecting Riksbank to keep the policy in line with the European Central Bank.

  • Much like the Euro, the Swedish Krona has been very range bound against Sterling, trading between 11.0 to 11.50 since November last year. Any unexpected policy changes or a ‘hawkish’ Central Bank could see the Krona surge past 11.0.



Western Union Business Solutions has based the opinions expressed herein on information generally available to the public. Western Union Business Solutions makes no warranty concerning the accuracy of this information and specifically disclaims any liability whatsoever for any loss arising from trading decisions based on the opinions expressed and information contained herein. Such information and opinions are for general information only and are not intended to present advice with respect to matters reviewed and commented upon.

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