GBP/USD comes close to 1.72 on strong inflation headlines

United States Dollar:

The pound rallied on Tuesday following the release of stronger than expected UK inflation data. UK CPI printed at 1.9% y/y vs. exp. 1.6% y/y. It was a big jump and took the market by surprise, even the hawks. The core data (which excludes the volatile food and energy items) was strong too and it likely means we’ll be hearing more and more calls for a UK interest rate hike this calendar year. It’s not fully priced in however, particularly so as Carney continues to point to there being a good degree of spare capacity in the UK economy. That said it will certainly put some pressure on the bank to act sooner. Meanwhile, GBP/USD gapped higher on the news by more than 100 points and the news continues to support sterling this morning. Soon after the inflation data yesterday, BoE Governor Mark Carney spoke before the House of Commons Treasury Committee Hearing. He said that the medium term outlook for interest rates had not changed but that any rate rises will be a result of improvements in economic data. He said that recent comments regarding the potential for rate hikes were meant to make markets more aware of risks. He pin-pointed the housing market as the biggest obstacle to economic recovery, which came as no surprise, and said that whilst he was aware of the strong inflation data released that morning that inflation expectations were well anchored. The momentum higher in GBP/USD continued following his comments. Attention then shifted to the U.S. as Fed Chair Yellen stepped up to testify before the Senate Banking Committee. There was little new in what she had to say on monetary policy, making reference to the improving labour market conditions and reiterating that interest rates would rise sooner should this trend continue. For the time being monetary policy would remain highly accommodative. There had been hopes that the Fed would strike a more hawkish tone but it wasn’t the case. In the moments before Yellen spoke, U.S. retail sales data was released and came in weaker than market forecasts at 0.2% m/m vs. exp. 0.6%. The news wasn’t necessarily positive for the US dollar but it did strengthen around about the same time as Yellen was speaking, largely a result of safe haven demand. Risk was sold after Espirito Santo Group’s holding company Rioforte Investments was said to be filing for bankruptcy. The company is reported to be unlikely to repay €897 million in debt held by Portugal Telecom. As a result GBP/USD slipped back from a high of 1.7180 and it opens this morning at 1.7145. UK employment data is the next focus for markets and is released at 9:30 am. It could well make for another busy morning session.

We expect a range today in the GBP/USD rate of 1.7055 to 1.7210

Euro:

German ZEW printed weaker than market forecasts again on Tuesday morning and it weighed on the single currency. Although it was weaker than expected it didn’t come as a huge surprise given that the most recent run of ZEW prints have all come in below forecasts. To say the news was shrugged off is perhaps going a bit far but investors were more concerned with what Fed Chair Yellen has to say on monetary policy in her testimony before the Senate that afternoon. As it turned out, the Espirito news stole the headlines and the risk off nature of trading saw EUR/USD slump under the 1.36 figure. EUR/GBP selling, mostly as a result of the strong UK inflation data also played a part and it means that EUR/USD opens in London at 1.3552.

We expect a range today in the GBP/EUR rate of 1.2600 to 1.2690

Aussie and Kiwi Dollars:

NZ inflation data printed weaker than expected overnight with Q2 CPI coming in at 0.3% vs. forecasts for 0.4%. A lacklustre milk powder auction also contributed to the mild sell-off in NZD/USD overnight. NZD/USD has fallen from .8815 to a low of .8690 in the past 24 hours. The Aussie dollar also fell overnight, this despite the release of stronger than expected China GDP. Chinese retail sales meanwhile were a touch weaker than forecasts and after initially reacting positively AUD/USD then tracked most other currencies lower vs. the USD amid risk averse trading conditions – it opens in London at .9350.

We expect a range today in the GBP/AUD rate of 1.8160 to 1.8300

We expect a range today in the GBP/NZD rate of 1.9360 to 1.9500

Data Releases for the next 24 hours:

AUD: CB Leading Index m/m, NAB Quarterly Business Confidence

EUR: Italian Trade Balance, Trade Balance

GBP: Average Earnings Index 3m/y, Claimant Count Change, Claimant Count Change

NZD: CPI q/q

USD: PPI m/m, TIC Long-Term Purchases, Industrial Production m/m, Fed Chair Yellen Testifies, NAHB Housing Market Index, Beige Book