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Eye on CPI (Consumer Price Index)

Eye on CPI (Consumer Price Index)

GBP
Market players are unsure whether to throw Sterling a lifeline or to punish the currency further on Thursday, following the mixed bag of economic releases from the United Kingdom.

The headline UK industrial production data was stronger than expected, rising 0.5% in June. Production and manufacturing output was unchanged on the month. However, construction output was weaker than consensus forecasts and the trade deficit was wider than expected with a net decline in exports for June.

With the UK economy ending the second quarter on a soft note, and with disappointing manufacturing data, speculation around the Bank of England (BoE) raising UK interest rates this year is likely to weaken even further.

GBP is still struggling to nurse its wounds following the sharp sell-off in Sterling last week after the BoE doves crashed the party in August’s monetary policy meeting.This, coupled with the weakening optimism of a UK interest rate rise, seems to indicate that the Pound could still drop lower.

The UK currency was unable to hold above the 1.3000 level against the Dollar even with the US currency under wider pressure. GBPEUR hit fresh 10-month lows around 1.1019 before a slight Sterling recovery saw the marginal price rise up to 1.1045.

There is no expected economic data due out for Sterling today which would leave other currencies to dictate the market volatility.

USD

Thursday’s downbeat US PPI figures, combined with dovish remarks from the Federal Reserve (Fed) policymaker Dudley, continue to weigh down on the US Dollar across the board.

Yesterday evening, Federal Open Market Committee (FOMC) voter Dudley joined the chorus of U.S. policymakers expressing concern about low inflation. He said it is going to take some time for inflation to rise to 2% as the current weak Dollar affects import prices. He believes that year over year price measures will be depressed for a while and that the economy may be a bit more sluggish. He also felt that sluggish productivity could dampen wage growth despite job gains. As one of the main drivers of Fed policy, Dudley’s cautious views confirm that the central bank is in no rush to raise interest rates, especially after this morning’s producer price report.

On another note, with tensions between the US and N. Korea showing no signs of abating, investors in the Greenback could be looking for a flight to safety.

The US CPI reading due at 12:30pm today is expected to show the cost of living ticked higher to 0.2% m/m in July. The core reading is seen rising to 0.2% month on month vs the previous reading to 0.1%. A better-than-expected core CPI data could yield a push below the 1.2965 level. Along with the US CPI print, speeches from a couple of FOMC members – Dallas Fed President Robert Kaplan and Minneapolis Fed President Neel Kashkari – would also influence Fed rate hike expectations and drive Dollar trading today.

EUR

There continues to be a lack of market data and comment from European Central Bank (ECB) officials to guide the Euro. The currency, therefore, continues to be subject to its rival’s movements.

Yesterday, the Euro yesterday lost ground in the early parts of the day against the Pound. However, stronger-than-expected manufacturing and industrial production caused the Pound to drop against the Euro, extending five-year lows to 1.1021. The Pound did make a slight recovery, however, closing at 1.1044.

The Euro strengthened against the Dollar to daily highs of 1.1780 as comments were made from New York Federal Reserve President Dudley yesterday relating to US inflation and Donald Trump’s diplomatic approach to North Korea. Further, today the Euro will be subject to volatility driven by CPI data in the US, potentially extending Euro gains once more.

Data to Watch:
6:45am EUR Consumer Price Index (EU norm) (YoY) (Jul)
12:30pm USD Consumer Price Index (MoM) (YoY) (Jul), Consumer Price Index n.s.a (MoM) (Jul), Consumer Price Index Core s.a (Jul), Consumer Price Index Ex Food & Energy (MoM) (YoY) (Jul)
1:40pm USD FOMC Member Kaplan Speech
3:30pm USD FOMC Member Kashkari Speech
5:00pm USD Baker Hughes US Oil Rig Count

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