UK CPI data came in earlier this morning WAY hotter than expected, showing inflation at 3.7% vs. an expectation of 3.4%. This is now becoming a problem in the UK as inflation is nearly TWICE as much as the 2% target and markedly higher than the BOE limit of 3%, and will require yet another letter of explanation from the BOE to the Chancellor of the Exchequer.
In the very least, this will put major pressure on the BOE to change their stance on accommodative monetary policy, and the minutes from the BOE meeting will show whether or not individual voting members are starting to cave to the pressure. While a change to policy could potentially help the Pound rise, the threat of stagflation may be a greater detriment going forward. Retail prices came in as expected.
In Canada, the Bank of Canada left rates unchanged this morning as was expected and boosted their outlook for growth in 2011 and 2012. However, dovish comments about the Loonie’s role in that growth have helped send it lower.
In the EU, Euro zone and German economic sentiment came in better than expected, but the current situation survey came in less than expected yet the Euro is higher as there is a hint of confidence that progress is being made with regard to the debt crisis.
In the US, empire manufacturing figures came in higher than last month with a reading of 11.92, but missed expectations of 12.5.
Today is a positive day for world markets, with Dollar weakness driving risk appetite.
In the forex market:
Aussie (AUD): The Aussie is higher as risk appetite has increased on a renewed outlook for the Euro and the belief that rebuilding due to the damage from the flooding may encourage business activity.
Kiwi (NZD): The Kiwi is mixed today as the market weighs the balance between risk appetite and the news that home prices declined for 3rd time in 4 months, showing signs that a sluggish economy may be hampering demand.
Loonie (CAD): The Bank of Canada left rates unchanged at 1% as expected and increased their growth forecast for the economy. However, comments that interest rate hikes would be “carefully considered” we seen as dovish which has helped push the Loonie lower this morning, in addition to lower oil prices. (Click chart to enlarge)
Euro (EUR): The Euro is higher across the board even though yesterday’s meeting of finance ministers failed to produce an agreement with regard to the how to combat the debt crisis. While there is some speculation that the emergency facility (EFSF) will be expanded, nothing concrete has emerged as of yet.
Pound (GBP): The Pound is trading higher against all but the Euro, as inflation data came in much higher than expected. The minutes of the rate policy meeting are due out on Jan. 26th, so we will see if there is any further support for less accommodative policy, perhaps in the form of a removal of asset purchase plan. (Click chart to enlarge)
Dollar (USD): The Dollar is mostly lower despite a higher Empire manufacturing number though it fell just short of expectations. The market is still grappling with whether or not the Dollar should rise or fall with equity prices (which are higher this morning).
Yen (JPY): The Yen is mixed as well as individual fundamental weakness in Canada and NZ is causing an un-wind of carry trades, though it looks like those money flows are making their way to the Aussie. Euro and Pound strength cause Yen selling.
As the different fundamental data comes in around the globe, it is easy to see how hot many flows will sell weakness and buy strength. However, sometimes the perception of strength is actually weakness, and vice-versa.
Take the Pound for example. There was immediate Pound strength right out of the gate as CPI data was reported. The thought was that higher inflation will cause the BOE to act to remove accommodative monetary policy. But upon further inspection, this may actually produce a negative economic condition whereby a shrinking economy due to austerity and higher prices due to inflation create stagflation which could essentially derail the UK economic recovery.
So round and round she goes and where it stops, nobody knows. The forex market tracks worldwide money flows and money always has to “land somewhere”. Whether it is another currency or another market, investors will seek out higher yielding assets when times seem stable and promising, and will run to safe havens when times look bleak.
This is the essence of the forex market so it is important that you have a good understanding of the market fundamentals if you are to succeed.
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