Tuesday, 12 Apr 2011

UK Inflation Figures Come in Below Expectations

At lunchtime during the European session the pound was trading lower following slowing inflationary data which may influence economists' expectations for British interest rate increases.

British CPI y/y came in below forecasts at 4.0% as a majority of economists predicted an increase of 4.4%. Lower than expected food costs were one reason for the slower price increases. The price data had traders selling the pound following the release of as the deceleration of rising prices may influence economists to scale back their expectations for an interest rate increase by the Bank of England. Previous forecasts were for an adjustment to the base lending rate in May but due to the slower gains in prices an interest rate adjustment may be pushed back until August.

The GBP/USD traded as low as 1.6226 from yesterday's high of 1.6425 and traded back at 1.6284. Today's low looks to be set as traders may have found an opportunity enter long following the pullback on the initial knee jerk reaction from the data release. Yesterday's high stands out as a good first target with 1.6460 on an extension.

The euro was trading higher at 1.4466 from 1.4391 after traders shrugged off disappointing German ZEW Economic Sentiment. The EUR/GBP is up at 0.8882 from 0.8834 with resistance at 0.8940. A close above this level would then target last March's high at 0.9150.

This afternoon is full of data releases with US trade balance numbers at 12:30 GMT and the Bank of Canada Overnight Rate announcement at 13:00. Strong US trade balance numbers could feed into further dollar selling. No adjustment is expected by the BOC but traders will be following the accompanying statement for signs of rising inflationary pressures or hints of monetary policy tightening.