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Daily Fx Strategy

CPI Softens Dollar Rebound, to Boost Risk Appetite

Wed, May 14 2008, 13:32 GMT
by Ashraf Laidi

CMC Markets

US CPI rose by a smaller than expected 0.2% while core CPI also by a weaker than expected 0.1% increase, translating into an annual rise of 3.9% and 2.9% in headline and core CPI. Regardless of whether these softer than expected figures reflect the true story of inflation in the US economy, they bear positive implications for risk appetite, US equities and prolonged yen weakness and CAD strength. But the figures may temper the dollar’s recent gains as they do not necessarily shut the door on a June rate cut.

More Sterling Damage as BoE Stagflation Dilemma Intensifies

The British pound dropped nearly another full cent to a 4-month low of $1.9366 after the much anticipated quarterly inflation from the Bank of England projected inflation to surge to as high as an annual rate of 3.7% in the third quarter of this year before slipping to around 2.25% in 2 years. The BoE clearly expects further downside in growth, anticipating GDP growth slowing near 1.0% by end of 2008, with chances of a contraction before attaining 2.4% in 2 years. The central bank has left very little doubt that it has joined the Federal Reserve in facing stagflation-like challenges. But the Bank of England stands out from the rest of major central banks in that it is expected to deliver the biggest policy easing going forward, mainly due to the relatively high level of its short term interest rates currently at 5.00%.

GBPUSD to retest the $1.9360 low, below which it is seen extending losses towards $1.9335. We expect the key 1.9300 foundation to be broken within the next month once the pair caught up between further BoE cuts in June and speculation of a hold in rates from the Fed. Resistance has dropped to 1.9460 while the 200 week MA is expected to act as the next key resistance at 1.9490.

EURGBP faces further upside despite a struggling EUR vs USD as the pair exploits prolonged UK weakness. Cross pair is expected to target key resistance at 0.7965-70, which is the 61/8% retracement of the decline from the 0.8096 high to the 0.7762 low. Baring any explicit signs of Eurozone weakness, we see EURGBP following on 0.7990, with medium term outlook suggesting 0.8035 near quarter’s end.

Euro Remains Consolidated

USDJPY Supported by Shifting Attention

Loonie Flies High

Published on  Wed, May 14 2008, 13:32 GMT

Archive

• CPI Softens Dollar Rebound, to Boost Risk Appetite
  Published On Wed, May 14 2008, 13:32 GMT
• Dollar Cheers Sales, Ignores Autos
  Published On Tue, May 13 2008, 13:41 GMT
• Sterling Deepens Gloom, Yen Gains on Risk Appetite
  Published On Fri, May 9 2008, 14:57 GMT
• USD Unable to Follow up, GBP Down Across the Board
  Published On Mon, May 5 2008, 14:58 GMT
• Why Optimism Remains Premature?
  Published On Mon, Apr 21 2008, 15:03 GMT

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