GBP/USD: Long In Good Shape After CPI Data

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EUR/USD: Market Shrugged Off Kaplan Suggesting June Hike

• Dallas Fed President Robert Kaplan said he is "very open-minded" to deciding whether to raise interest rates at a mid-June policy meeting. He said an April 26-27 policy meeting will be too early to tell whether the strong jobs growth or the weak economic growth was the enduring feature of the first quarter of this year. Kaplan is rather dovish in his opinions and does not have a vote on the Fed's policy committee this year. A suggestion from another dovish Fed official makes a hike in June very likely and this is our baseline scenario. Futures markets are far more skeptical of a tightening until December.

• The dollar barely reacted to rather hawkish comments from Dallas Fed President Robert Kaplan. This shows that the potential to USD appreciation is limited in the near time.

• Rising tankan line, currently at 1.1383, highlights the continued bullish momentum that persists within the EUR/USD market. The nearest resistance level is 1.1495 high on October 15, 2015. Breaking above this level will open the way to our target at 1.1600. We have locked in profit at 1.1380.

GBP/USD: Long In Good Shape After CPI Data

• Consumer prices rose 0.5% yoy compared with a 0.3% increase in February. The market had expected a 0.4% yoy rise.

• Air fares surged 22.9% between February and March this year, a jump that reflected the timing of the Easter holidays. Clothing and footwear also contributed to higher inflation, although food and petrol prices dragged.

• A measure of core consumer price inflation, which strips out changes in the price of energy, food, alcohol and tobacco, rose to 1.5%, its strongest since October 2014. The market had expected it to rise slightly to 1.3%.

• There were other signs that inflation pressure is slowly building again. Factory gate prices fell 0.9% year-on-year, the smallest decrease since November 2014 and compared with forecasts of a 1.0% annual drop.

• The Bank of England said in February that it expected inflation to stay below 1% all year and to undershoot its target until 2018, due to the global slump in oil prices, the effect of past rises in sterling and lacklustre wage growth.

• We and the consensus expect the BoE to keep both QE and policy rate on hold at the meeting this Thursday. Given the uncertainty ahead of the EU referendum on June 23 it is unlikely that the BoE is ready to entertain any hawkish inclinations. Our scenario is for a 9-0 vote for no change in rates. Some market participants expect that Gertjan Vlieghe or BoE Chief Economist Andy Haldane could vote in favour of a rate cut. In our opinion the probability of such a scenario is very low and market disappointment could result in stronger GBP after the statement release.

• Our long GBP/USD position opened at 1.4075 is in good shape after today’s British CPI data. We stay long for 1.4400. What is more, in our opinion the GBP is likely to outperform the EUR in the near term. We went EUR/GBP short at 0.8025 yesterday, but this strategy is much more risky.