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Weekly FX Report (23-05-11): Pound Sterling fluctuates against data, inflation releases

The markets opened the past week of trading in a rather moot fashion, with slight gains in risk sentiment seeing Euro crosses appreciate while the Sterling traded in a rather volatile manner as a result of a stacked economic calendar from the UK. Markets continued to keep Greece in main focus and Friday's downgrade by rating agency Fitch ruined an otherwise positive week for the EURUSD pair.

By Gaurav Kashyap, Alpari ME DMCC

EU CPI data fails to spring surprises

Pricing action in the EURUSD was once again determined by the flow of risk sentiment based on the ongoing developments regarding Europe’s sovereign debt crisis. It was a rather light economic calendar for the Euro – perhaps the biggest piece of data being the CPI data released on Monday. And as largely expected, the data failed to spring any surprises.

EU CPI came in exactly as expected – YOY 2.8% act v 2.8% exp / 2.8% prev and MOM 0.6% act v 0.6% exp / 1.4% prev and CORE CPI 1.6% act v 1.5% exp / 1.3% prev. The Eurozone trade balance which followed shortly after the CPI reading showed a widening trade surplus to 2.8bn act v 2.0bn exp. The improved trade data showed that exports are picking up from within the EU – reflecting Euros flowing into the currency and which would lead to a natural appreciation (the Feb reading was revised down to -3.0bn from -1.5bn prev).

Fitch downgrade of Greece rating rocks credit markets

Surprisingly, the EURUSD sold off in the immediate aftermath of the news, perhaps because the lack of price growth tapered off views that the ECB would be forced to hike rates. Following Monday’s headline news, the EURUSD managed to move from an intraweek low of 1.4047 to hit 1.4324 before Fitch cut Greece’s rating three notches to B+ this past Friday.

The announcement rocked credit markets and saw the pair selloff more than 150 points to close at 1.4150 levels. Friday’s news was perhaps the only blemish in a rather good week for the Euro which continues to solidify the trading strategy that the only factor underpinning a larger upward move in the Euro remains to be centered on the Europe’s sovereign debt issues.

UK CPI data shows inflation increase

The British Pound found itself trading in a range between 1.61 and 1.63 against the USD in a week stacked with event risk for the Sterling. Perhaps the mixed nature of the releases led to the Pound fluctuating in this two hundred point range. Tuesday’s increased CPI reading failed to spark any kind of buying rally in GBPUSD. Instead the pair traded up to its intraweek high point of 1.6303 before settling back below pre-release levels, which indicated that the markets didn’t quite have the faith that the inflation data will be enough to convince the BoE of a rate hike.

YoY inflation increased to 4.5% act v 4.1% exp / 4.0% prev with the core CPI increasing to 3.7% act v 3.2% exp / 3.2% prev. MoM CPI increased to 1.0% act v 0.7% exp / 0.3% prev. It was the fastest pace increase for more than two and a half years, largely attributed to increases in travel costs associated with the Easter holidays as well as price spikes in other holiday items like alcohol and tobacco. The recently concluded royal wedding and unusually warmer weather led to higher consumer spending and perhaps weaker growth forecasts in the UK as mentioned in the inflationary report underpinned any upside moves in the GBPUSD.

Wednesday’s BOE meeting minutes showed no changes in the voting pattern (6 to 3) while the same eight members of the Committee voted to hold the current stock of asset purchases, with Adam Posen being the sole member voting for an increase to 250 billion (unchanged). The fact that there was no change in the voting pattern coupled with the fact that jobless claims nearly doubled (UK jobless claims increased to 12.4K act v 0.0K exp / 6.4K prev) saw GBPUSD aggressively selloff from 1.6270 levels to hit an intraweek low of 1.6104.

There would be no conclusive break of the key technical level of 1.61 as retail sales managed nice gains across the board and brought some of the risk appetite back into the GBP crosses. MOM retail sales ex auto fuel came in at 1.2% act v 0.8% exp / 0.4% prev while the YOY ex auto fuel came in at 2.7% act v 2.2% exp / 0.8% prev. Retail sales including auto fuel increased to 1.1% act v 0.8% exp / 0.3% prev MOM. YOY was at 2.8% act v 2.5% exp / 1.1% prev.

Canada price growth sees slowdown

And finally, data from Canada showed that price growth was starting to slow down. YOY consumer prices in Canada stayed level at 3.3% act v 3.3% prev while the MOM reading had a large drop to 0.3% act v 1.1% prev. Core CPI slowed to 1.6% act v 1.7% prev on the YOY reading. The weaker data saw USDCAD shoot from 0.9650 levels to 0.9734 levels, gaining little more than 0.4% on the week.