Today's Interbank rates -
POUNDS TO US DOLLARS 1.5835
POUNDS TO EUROS 1.1841
POUNDS TO AUSTRALIAN DOLLARS 1.5930
EUROS TO US DOLLARS 1.3404
EUROS TO POUNDS 0.8464
EUROS TO AUSTRALIAN DOLLARS 1.3485
POUND HEADLINES:
- Sterling fell back against an all conquering EUR yesterday, but the underlying positive tone to GBP/USD remained, and looks set to persist for a bit as the high December CPI print approaches next week and the talk of higher European rates helps sustain recent UK yield rises.
- Initial resistances for GBP/USD at 1.5910 and 1.5935. There's nothing to hurt GBP today but it remains vulnerable to evidence of weak service sector growth.
- Today's data releases are firmly anchored around inflation conditions on both sides of the Atlantic. Given the sizeable output gap and relatively weak employment conditions both in the US and UK, the inflation focus is less about wages and more about imports, especially in light of the recent rises in crude oil and food prices.
- Euro strength yesterday was partly about a modestly hawkish tone from ECB president 'Trichet' on inflation, partly about stops being triggered as the Spanish and Portuguese auctions turned out to be reasonable and EU periphery credit gained support from talk of German support for amendments to the EFSF.
- Trichet's comments were not especially surprising, and at this stage we would not expect the rally to extend far. The recent range top at 1.3433 in EUR/USD should hold, and renewed declines may be seen in other more risk positive EUR crosses.
- German CPI for December comes in as expected at 1.0%. The year-on-year figure also met expectations of 1.7%
- The USD weakened yesterday as the initial claims data disappointed, risk appetite remained positive and the Euro staged a sharp recovery. Most of the action in the EUR/USD was about the Euro rather than the USD, but the early euphoria about the US economy this year may be giving way to a dull assessment, despite Bernanke's comments overnight, and this won't play well for the USD if the generally more positive economic tone is more evident elsewhere, especially as other central banks are sounding much more hawkish.
- In the US, rising energy and food prices should have had little effect on the headline CPI figure, partially mitigated by a firm US dollar in December. It is expected little movement month-on-month in either core or headline series for December. The CPI core forecast for the year to December is expected to be negligible 0.8%.
- Other key data from the US today will include December retail sales, which could prove to surprise to the down side given poor winter weather conditions in the North East during the holiday season.
Kris Charalambides
Tel: 0207 183 2790
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