– Strong CPI produces a GBPUSD bounce from technical support at 1.5851
The annual rate of UK inflation rose to 2.7% in October, up from 2.2% in September. The rise in education fees accounted for 0.3 percentage points of the rise, which still leaves a healthy 0.2 percentage of the increase explained by other factors. Our economist notes that there is some upside news in this release and that was likely to have been a factor in the MPC’s decision to stop QE at last week’s meeting. It would be a surprise if given this news and the small further easing in policy implied by the Treasury’s coupon grab from the APF if tomorrow’s Inflation Report presented forecasts for CPI in two years time much at all below the Bank’s 2% target. GBPUSD has fallen to a two-month low just above its 200 day moving average at 1.5851. The CPI reading produced a strong bounce and created decent upward momentum. We remain very bullish for GBPUSD, targeting a move to 1.68 in combination with more aggressive Fed easing to be announced at the December 12 FOMC meeting. Markets will scrutinise the BoE’s quarterly Inflation report on Wednesday, especially the latest growth and inflation projections, for indications on the outlook for the economy and monetary policy. Our UK economists forecast a recovery in UK GDP to 1.1% in 2013 and 1.7% in 2014 while prospects for further balance sheet expansion under the QE program have receded significantly. Long GBPUSD exposure at 1.5900 represents an excellent risk-reward for a move to 1.68 with tight technical support just beneath at the 200 dma.
– Greece needs extra financing… hardly a surprise. German ZEW data unexpectedly disappoints
Greece’s international lenders have agreed to grant the country two more years to make the cuts demanded of it but the euro zone and IMF clashed over a longer-term target date to shrink the country’s debt pile. While finance ministers gathering in Brussels did not release more aid and by granting a request from Athens for more time, face an extra funding bill of around 33 billion euros, according to a document prepared for the meeting. In European headlines, a draft Troika report on Greece said the country may need 32.6B euros of additional financing through 2016. The exact mechanisms of filling the budget gap remain unclear at this point, but the relatively positive ‘noises’ from the Eurogroup finance ministers’ meeting hint that a solution will probably be reached during this month. European officials also said they will address the issue of the 5B euro Greek bill redemption due on November 16. EUR is likely to remain vulnerable until there is a least a tentative resolution to the current multitude of uncertainties (Greece, Spain, US fiscal cliff). That said, we would not chase EURUSD lower at this point, and still expect the pair to rebound late in the year in response to the Fed’s aggressive QE3 stance. As the market begins to relax over Greece as the funds are released, the EUR should rebound. Further disappointing German ZEW data this morning has not proven to be the shot in the arm that the EUR needed. The current situation index fell from 10.0 to 5.4 – a new cycle low. Expectations unexpectedly fell back to -15.7 vs forecasts for a rise to -10. This data bolsters recent weak data from the eurozone core.
– USDJPY moving nicely lower, next stop 78.00
Jittery markets have been positive for JPY over the past week, and we maintain our USDJPY short trade, initially entered at 79.65 and targeting 77.00. Assuming that the full fiscal cliff scenario is avoided, Fed’s QE3 should still re-emerge as a key market driver. Our current favoured USDJPY indicator – the 2 year US-Japan yield spread – has also turned lower and is now signalling further downside. Finally, our measure of market positioning also shows JPY shorts reaching clearly overextended levels last week, reinforcing the view that further downside is likely for the Japanese currency. Our Positioning analysis suggests that investors are currently holding broadly neutral USD positions. This provides scope for short USD positions to be established as the market builds expectations for the Fed pulling the trigger on outright Treasury purchases.
BNP Paribas