UK Inflation!
In what seemingly is an exercise in futility when it comes to rising prices in the UK, the BOE inflation report was released earlier this morning and showed that indeed they are concerned about inflation. The report noted that CPI could eclipse 5% by year end, but the assumption is that in the long-term, it would fall back to near the Central Bank’s target of 2%.
Well how the heck is that going to happen? Through rate hikes naturally, though the report did not spell that out explicitly. However the market understands the severity, and the Pound is trading higher as a result. Tomorrow’s GDP estimate will complete the picture.
Overnight in China, CPI data came in slightly higher than expected at 5.3% vs. 5.2% and it is somewhat unclear if that is enough to cause China to apply the economic brakes once again. The economic summit taking place here in the US has gone on with little fanfare.
Meanwhile the Greek saga continues and today is rather quiet on that front, though whispers of a collapse still persist. Competing interests in the market would like to see different outcomes and the longer this goes on without resolution, the worse it will be.
Yet today cannot really be classified as either risk-taking or risk-aversion as individual fundamentals have been more in focus. Oil prices are lower to start the day, and stocks and other commodities are mixed.
In the forex market:
Aussie : The Aussie is mixed today gaining strength from higher Asian stock indices, but weakness from a potential Chinese slowdown. Tomorrow’s employment report will guide rate expectations.
Kiwi : The Kiwi is mostly lower after home sales figures declined but less than expected. This comes a day after the IMF claimed the Kiwi was 20% overvalued so the market will be watching for signs of economic weakness.
Loonie : The Loonie is mostly higher after the Finance Minister vowed to balance the budget deficit after his party won in elections. In addition, the Loonie is receiving money flows from the Aussie and Kiwi as they are not as directly affected by a Chinese slowdown.
Euro : The Euro is lower across the board as the outcome for Greece is still up in the air. German CPI data came in hotter than expected, highlighting the dichotomy of the EU’s best and worst economies.
Pound : The BOE inflation report acknowledged that inflation remains, uncomfortably high and that it could exceed 5% by year-end. While not explicitly stating rate hikes were forthcoming, the market has been able to read between the lines. Whether or not the BOE will have the conviction to hike in the face of a declining economy is another question entirely.
Dollar : The Dollar is mixed after trade balance figures showed a slightly higher trade deficit than had been expected. Even with the benefit of a weak Dollar, the importing of oil prices erased the benefit to exporters. Basically just spinning our wheels.
Yen : The Yen is weaker against all but the Euro as the outlook for corporate earnings is overshadowing risk in the market for the second day in a row. The potential for a Chinese slowdown could affect exports, though any negative effect won’t be felt until later.
Well it’s about time that the BOE woke up and at least admitted that inflation is a problem, but whether or not they do anything about it will remain to be seen. As I mentioned yesterday, the GDP estimate due out tomorrow is likely to be low-balled, thereby lowering the bar.
Meanwhile, China may be starting to come around to the fact that there is a need for the Yuan to strengthen to rebalance the global economy, but actions speak louder than words.
Non-action in the EU with regard to the debt crisis has darkened the cloud of risk surrounding the single currency and everyday that goes by without a solution will make it harder to achieve one.
In other words, just a normal day in the forex market!
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