Cable Crashes Through 1.5900 on Tame Inflation Data

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Market Drivers for November 12, 2013
German WPI turns deflationary putting downward pressure on EUR/USD
UK CPI much weaker sending cable tumbling
Nikkei 2.23% Europe -0.07%
Oil $94/bbl
Gold $1278/oz.

Europe and Asia:
AUD NAB 5 vs. 12
EUR GE WPI -1.0% vs. 0.3%
GBP UK CPI 2.2% vs. 2.5%

North America:
No Data today

Much weaker than expected inflation data send cable crashing through the 1.5900 figure as currency traders sold the unit on the assumption that BoE will be under no pressure to curb its ultra accomodative monetary policy for the foreseeable future.

UK CPI printed at 2.2% versus 2.5% eyed. This was the lowest reading in a year and a massive drop from the 2.7% level of the month prior. The drop in energy prices was a big factor in reducing price pressures, but transport costs and education costs also declined significantly. On a core basis CPI came in at 1.7% versus 2.2% forecast which was the lowest reading since 2009.

The sharp decline in price levels certainly lifts the pressure off the BoE just as it is about to release its inflation report tomorrow. The UK central bank remains in a highly accomodative mode even as economic data continues to show improvement. The drop in inflation is likely to help the central bank in attempt to stimulate the economy especially if tomorrow’s labor data reveals better wage growth which should raise real incomes for UK citizens.

Cable quickly crumbled on the news breaking through the 1.5900 barrier before finding support just ahead of the 1.5850 level. Although the knee jerk reaction in the market was negative towards the currency, the longer term economic implications are likely to be positive for UK. If tomorrow’s labor data report shows healthy employment growth, the combination of falling prices and expanding economic activity should boost the pound and the pair could move towards the 1.6000 level once again.

In Europe, where growth is sclerotic, the news on the inflation front was not nearly as upbeat. as German WPI reading came in at -2.7% versus 2.2% forecast, reviving fears of deflation in the region. ECB policy makers tried to dismiss talk of deflation, but the contraction in price levels is becoming a real concern in the Eurozone and if the trend does not reverse quickly, the pressure on ECB to ease further and perhaps consider negative deposit rates is likely to increase.

Euro fell to a 1.3358 in morning Frankfurt trade after a half hearted attempt to rally above the day’s highs in Asia. The pair remains above the 1.3300 level of support, but if the eco data from the region does not improve soon, the euro could once again revisit the lows sets post ECB rate announcement.

In North America today, the calendar is quiet once again, but the dollar continues to perform well especially against the yen. Overnight USD/JPY rose to a high of 99.81 as risk flows helped to lift the Nikkei by more than 2%. If US equities extend the rally and bond yields rise on the expectation of better US growth USD/JPY could make a run at 100.00 as the day progresses.

Boris Schlossberg
Managing Director

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