EURUSD trades lower on US inflation expectations

Forex News and Events

The unexpected increase in US core inflation prompted a surge in USD buying and sell-off in US yields. US headline CPI rose a merger 0.7% m/m, pushed by a -9.7% in energy prices however core inflation increased 0.2% m/m. The transitory nature of the headline read indicates that by mid-year inflation should reverse and trend higher. The latest Job Openings survey also showed the highest number of job vacancies in this expansion cycle, indicating that robust job growth will continue.Which should equal a storng paryroll report next week. It’s only a matter of time when the tightening of the labor markets will put pressure on labor cost and prices. This should reverse the current decline in inflation caused primarily by the rapid fall in oil prices, as wages play a much larger part in applying pressure. On the gorwth side next weeks US ISM index is expected to demonstrate the marginal pullback in industrial activity was short lived. We are still in the view that the Fed will signal to the market an impending rate hike in April with the first hike in June. We remain constructive in the USD against its G10 peers, adding that perhaps the principal barrier to substantial USD strength might actually come from the Fed. In Yellen’s balanced approach to communication on timing and selective mention of the USD, the Fed Chair has shown she is willing and able to manage FX markets. On the other side of the Atlantic, despite the marginal optimism generating from Germany signaling their approval for the Greeks four month bailout extension, Europe economy remains fragile. The weaker Euro and cheaper energy prices will clearly benefit the European economy. However, the overall debt burden will continue to be a drag growth. With lingering unemployment issues, untethered disinflationary threat and governments seemingly powerless to provide solutions (preoccupied with Greek bailout negotiation and rising left wing parties). Focus will remain on the ECB incoming QE program and possibility of expanded action. Next week the ECB will actually start is government bond purchases it will be interesting to see who actually sells bond to the ECB and effect on curves.

The sterling should be a primary beneficiary to Euro weakness. While the GBP has been weak against the USD it remains firms verse the Euro. We remain bearish on EURGBP with expectations to re-test support at 0.7255. Continued worries over the execution of the new Greek Bail agreement and with the ECB embarking on its own QE program against evidence that wages are rising in the UK helping growth outlook, indicates further downside for EURGBP. A bearish breakout below 0.7255 will target 0.7090 then 0.6895.