Talking Points
• Japanese Yen: Finds Support Below 110
• Euro: Bounces From 1.4820
• British Pound: Inflation Rises To Highest On Record
• US Dollar: Trade Balance on tap
The Pound failed to break below the 1.8970 price level twice during the overnight session, finding support each time. Surprisingly the second test cam after U.K. inflation data printed hotter than expected at 4.2% against 4.0%. It was the highest level since 1997 and a 0.6% increase from June’s 3.8% reading. The main driver was an 12.3% increase in food prices, which signals that despite the recent decline in Oil, inflation pressures will continue to exist.
Indeed, core prices also rose 1.9%from 1.6% the month prior as price pressure spreads throughout the economy. BoE Governor King has previously stated that he expects inflation to remain their 3% threshold for several quarters, which will require him to write another letter of explanation at the end of the quarter to Chancellor Darling. Tomorrow’s quarterly inflation report will give us further insight into the central bank’s outlook and possible signs of future monetary policy bias. The MPC left rates unchanged and their last meeting and we will have to wait until August 20th to see the vote tally. Therefore, tomorrow’s comments could present major event risk for the Sterling.
The Euro bounced off of support at 1.4815 climbing back above 1.4900. The pair has continued to trade lower as the outlook for the European economy grows dimmer. The French current account deficit widened to -4.4 billion from a revised -2.8 billion, as a strong Euro continues to weigh on demand for exports. Meanwhile, domestic growth continues to weaken as consumer’s struggle with high credit costs and rising inflation. President Trichet’s recognizing the softening of the economy has continued to weigh on the Euro despite hawkish comments from Klaus Liebscher. Indeed, Thursday’s GDP reading is expected to show that growth in the second quarter contracted which could lead to traders pricing in a rate cut as soon as early 2009.
The upcoming U.S. trade Balance report is expected to show the deficit widening, which is most likely due to a decrease in exports. The rest of the world has caught the U.S.’s cold and their slowing growth will continue to weigh on demand. The release could highlight concerns that if the on area of growth for the U.S. economy begins to weaken and the slack isn’t taken up domestically, the economy may sink further, which could weigh on the dollar today. Yet, with oil prices threatening to fall below $113 a barrel and gold falling to a seven month low, we could see the dollar strengthen further.
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