Market Drivers for July 15 2014

RBA Minutes reaffirm that rates will remain stationary

UK CPI much hotter, Carney

Nikkei 0.64% Europe -0.34%

Oil $100/bbl

Gold $1310/oz.

Europe and Asia:

AUD RBA Monetary Policy no change on rates

GBP UK CPI 1.9% vs. 1.6%

EUR ZEW 27.1 vs. 28.9

North America:

USD Retail Sales 8:30

USD Empire Manufacturing 8:30

USD Yellen testifies 10:00

Pound popped back above the 1.7100 figure as UK inflation surprised with much hotter than expected reading putting further pressure on the BoE to normalize interest rates sooner rather than later. UK CPI rose 1.9% versus 1.6% eyed – its biggest month over month gain in more than a year.

UK inflation was driven higher by food, clothing and airfare increases and is now within a whisker of the 2.0% level. UH housing price also rose more than expected increasing 10.5% vs. 9.9% forecast with housing in London area soaring by more than 20% on a year over year basis.

Testifying before the Treasury Select Committee on the issue of bank stability, BoE Governor Mark Carney made no mention of the newly released inflation numbers, focusing instead on the macroprudential rules that the central bank is putting in place in order to prevent another housing bubble. Still today’s data suggests that price level in the UK economy is clearly picking up at an alarming pace and the BoE may have to hike rate before the end of the year in order to keep inflation expectations in check.

Tomorrow’s UK labor report could prove key to market sentiment with respect to the pound. If the numbers show further reduction in unemployment rolls and more importantly if average price earnings rise more than expected the pressure on the BoE will increase exponentially and cable is likely rise to new yearly highs above the 1.7200 level.

Meanwhile in Germany the data was not nearly as sanguine, with the ZEW survey declining for the seventh straight month. ZEW came in at 27.1 versus 28.9. German investor morale dropped to its lowest level in 1 1/2 years as geopolitical risks and slowdown in economic activity in May all weighed on sentiment.

EUR/USD fell below the 1,3600 level in reaction to the data, as the market is slowly coming to realise that the recovery in the EZ may be stalling. Yesterday we noted that the euro remained surprisingly strong because of low US yields and reserve diversification by the Chinese, but the pair may come under further selling pressure as markets begin to refocus on the region’s fundamentals.

Meanwhile, the focus today will shift to Janet Yellen as she gives her semi annual testimony in front of Congress. The market will be eager to see if Ms. Yellen shifts ever so slightly towards a more hawkish bias given the improvement in the recent US labor data statistics. Over the weekend there were reports in the media that some of the more centrist members of the FOMC were considering the prospect of an accelerated timetable to hike US rates.

Ms. Yellen however, is unlikely to veer off script emphasizing the Fed’s decision to end QE by October but not revealing much about Fed’s interest rate policy for the time being. Still, market participants will be eager to hear her view on the current state of the US economy and if the Chairwoman provides an upbeat assessment of the present conditions, that may be enough to push US yields higher and provide some lift for USD/JPY as it tries to target the 102.00 level once again.

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