Talking Points
JPY Tertiary data declines for first month in three
UK CPI core lower than expected
TICS on tap as well as inflation in US
After staging mild rallies in late Asian trade, both euro and yen retraced most of their gains by early European trading as market players positioned themselves for key US economic releases due later in the day. In Japan the Tertiary Industry Index disappointed to the downside printing at -0.6% versus 0.2% expected, the first such decline in three months. The sharper than expected fall was caused by higher oil prices which curbed consumer demand. Structurally, the Japanese services sector remains healthy with the quarterly reading reaching its second highest level since 2000. If oil prices continue to recede from their record highs, the Japanese economy should receive a welcome boost as consumers will likely direct more of their income towards discretionary spending.
In UK today mixed economic news helped to keep the pound pinned below the 1.8900 level as housing data proved buoyant but inflation gauges suggested little pricing pressure in the pipeline. The RICS House price balance rose to 31 from 30 expected its highest reading since 2004 indicating that UK housing demand remains reliant. The news on the inflation front however, was far less bullish for pound longs as core CPI came in at -0.1% versus 0.0% expected. The inflation data should put to rest any speculation of yet another BOE rate hike in the coming months. While the housing sector remains a surprising source of strength for the UK economy, consumer spending is still relatively tepid putting a lid on any additional BOE tightening. This weeks employment data and Retail Sales should provide further clues to the pace of growth in the UK economy and only if they report materially higher will they provide the fundamental arsenal to rally cable higher.
Today, the primary event risk lies with the US data. The FX market will first focus on the PPI numbers likely to be hot given record prices in crude. This in turn could serve as further catalyst of dollar buying especially, if the TICs number, due 30 minutes later, exceeds expectations of $63.2 Billion. If however, both economic releases disappoint, greenback strength could quickly evaporate as all speculation on future Fed hikes will be pushed aside and dollars structural deficit problems will once again move to the forefront.
