US CPI release ahead to likely garner some exaggerated moves in FX

Yesterday’s market action

Yesterday morning began with better than expected UK Retail sales with the MoM including fuel at 1.2% against the 0.4% expected and ex fuel at 1.2% against 0.2%. This allowed the GBPUSD to make a new high for the session, challenging the previous reversal on May 19th at 1.5666. We have since ranged, demonstrating the divergence between the Euro and the Pound. We also saw the ECB minutes released; little surprise came from this as we saw the reiteration of previous sentiment that “emphasis should be placed on a steady course...” This has put to bed any early assumptions of a removal of policy and following Coeure’s comments that the purchases could be frontloaded to the summer months, as prices are currently off of their highs.

Yesterday saw several higher profile US data releases print okay-lower on their expected readings. Initial Jobless Claims maintained its 4-week average at a 5-year low, providing some solace but overall the Manufacturing PMI presented more of a challenge with a third consecutive lower reading. Existing home sales also disappointed with a decline of 0.3pts at 53.8. The better than expected Housing Starts and Building Permits data has seemingly outperformed the rest of the weaker US data and many analysts are now looking for a period of weaker data for the months ahead. All these have, effectively, put to bed any potential notion of a June rate hike and a re-pricing of the dollar, taking into account a later commencement date.

Today’s View

This morning saw the release of the German IFO numbers, posting better than expected over the majority of estimates with the expectations in-line at 103. There was a fairly muted reaction in German equities as simultaneously we had the release of comments from the Volkswagen Group forecasting lower sales figures due to competition. The expected equity upside from relatively good beats of the expectations was also limited from central bank risk as we have a host of speakers scheduled for today; Draghi was scheduled to speak just after the IFO release thus movement was limited. In the hours following we saw a large scale push higher in the EURUSD on the back of Euro strength, resulting in an inversely correlated move of the Dax pushing lower.

This afternoon sees the release of US CPI; this is likely to have some bearing for the rate-lift discussion and any divergence from the expected (+0.1% MoM and -0.2% YoY headline, +0.2% MoM and +1.7% YoY for the Core numbers), will likely garner some exaggerated moves. This is the risk event for the session ahead and traders are recommended to reserve some ammunition ahead of this. We have seen PPI for the month print lower last week so there is some evidence for a potential drop in this number.