NEWS / Foreign Exchange

British pound shot up to a 15-year high against the dollar this morning

U.S. economic data yesterday provided little direction to currency traders. On one hand, retail sales data for March were stronger-than-expected when upward revisions to February are taken into account. In general, the data indicate that U.S. consumer spending remains solid. On the other hand, the Empire State index of manufacturing activity printed a bit weaker than expected. In addition, the NAHB housing index rolled over in March, suggesting that the housing market continues to struggle. Dollar exchange rates generally traded quietly yesterday and are little changed relative to 24 hours ago.

The major exception to that statement is the British pound, which shot up to a 15-year high against the dollar this morning after March CPI data printed much higher than expected. The overall CPI inflation rate rose from 2.8% in February to 3.1% in March, the highest year-over-year rate since 1992. Short-term British interest rates are up significantly this morning on the expectation that the Bank of England has more tightening to do to insure that CPI inflation returns to the Bank's 2% target in a reasonable period of time.

Speaking of inflation, U.S. CPI data for March are slated for release this morning at 8:30 EDT, and the market consensus forecast anticipates that the overall CPI rose 0.6% relative to the previous month. (The "core" CPI is expected to have risen 0.2%.) Although U.S. economic growth has slowed, the Fed feels constrained in its ability to cut rates due to an inflation rate that, in its view, is unacceptably high. Benign inflation data could eventually open the door to Fed easing. Therefore, a lower-than-expected outturn this morning likely would lead to further dollar depreciation. On the other hand, a higher-than-expected outturn could give the greenback some short-term respite.