GBP rallies despite a lower CPI figure

GBP pushed higher yesterday despite the fact that CPI data released showed that inflation fell to a four year low of 1.7% last month. This is the second month in a row that the rate has fallen below the Bank of England’s intended rate of 2%. There is, however, increasing speculation that interest rates may have to be increased in the medium term to combat rising inflation but, for now, things are going to stay put. Despite all of this, GBP gained against most of its major counterparts – perhaps on the back of statements from Prime Minister, David Cameron, and fellow politicians that the economy is growing although at a sustainable rate that prevents inflation from spiralling out of control.

There was little data to grab hold of yesterday from the Eurozone aside from German IFO readings that came in worse than expected for the most part. It was then down to data from the UK against which the euro traded. With the UK’s inflation data looking decent, EUR lost out as GBP clawed its way to 1.1993. In reverse terms against the USD, Euro has proved resilient as it has done since the FOMC results last week when it lost a lot of ground against the Greenback. Yesterday the resilience was for all to see as Euro reclaimed its spot in the 1.38’s but ran into some profit taking at just shy of 1.3850 – trading in a 60 pip range for the day. Most notably yesterday was Mario Draghi’s speech at 16:00 in which he detailed once again that the ECB will go to extra lengths in order to support the bloc nation – he also took the time to reflect on the FX market expressing that a good deal of low inflation is due to price adjustments which could mean that the ECB is on a soft mission to weaken the Euro, or at least keep it under 1.40 against the USD. Today we will only see the release of moderate market moving data; however, it is likely to be priced in. Gfk Consumer Confidence from Germany at 7:00 GMT which as the title suggests measures the level of consumer confidence in economic activity. A high level stimulates economic expansion whilst a low drives to economic downturn.

For the dollar, Asian shares raced to two-week highs on Wednesday, with investor confidence getting a much needed boost from positive US data. US consumer confidence rose more than expected in March, to its highest level since January 2008 and US house prices increased solidly in January. The two reports were the latest in a string of positive reads on the US economy, adding more credence to the view that softness earlier this year was related to bad weather and not inherent economic weakness.

While consumer confidence has been volatile in recent years, it has improved significantly from the levels seen during the recession, we expect consumer confidence to continue moving upward in the coming months as housing and labour markets continue to improve. The US Dollar has performed well this month largely as a result of the March FOMC statement and Fed Chair Yellen’s press conference, which was perceived as hawkish. The FOMC statement shifted from thresholds to qualitative guidance and quickened the expected pace of its rate hike cycle. High impact data due out today: USD CPI (12:30pm).