Good news for us…but not the Pound
It is one of the peculiarities of the FX market that what we term ‘good’ for the Pound is often not good for us individuals from a financial point of view.
Inflation is one such example that is good for the Pound and not for our pockets. Therefore, individually speaking, the good news is that inflation (the UK CPI inflation for February) dropped to zero, the lowest on record and a little below consensus. This means life is getting comparatively cheaper for all of us. However, since inflation is a major factor in the Bank of England’s interest rate considerations, this news is not good for the Pound and consequently it has lost value against USD and EUR. Effectively the markets feel that an interest rate rise, which was on the cards for late 2015 or early 2016, has now been pushed back and a rate cut is now being factored in.
The fall in inflation was driven by a downside surprise in core inflation which, cutting a long story short, is down to falling oil prices, a global phenomenon. It is therefore quite surprising that US inflation actually increased 0.2%. This has given USD further support in what is already a buoyant time for the currency. This afternoon we will see the Durable Goods Orders data released in the US which may well be positive and drive USD to new highs.
Yesterday Business sentiment in the Eurozone surprised to the upside, led by Germany. The composite Euro area Purchasing Managers Index (PMI) rose above expectations. Today’s European data may well be positive but whilst the Greek winds have died down, it will only take a few disputed sentences from the interested parties to turn into a storm once more.
Later today we will also see a scheduled bulletin from the Swiss National Bank (SNB). It is expected that we will hear they will persist with negative interest rates, providing a meaningful disincentive to hold large CHF deposits, which in turn strengthens the CHF, making the country economically less competitive. However if the Euro weakens further because of the ECB’s QE, the SNB will need to accept further appreciation against EUR before intervening in the FX markets…again.