NEWS / Foreign Exchange

Pound Clears 2.000 ??“ Can it Stay There?

Talking Points

??? Japanese Yen: Consumer confidence improves on seasonally adjusted basis
??? Euro: ZEW much better that expected
??? British Pound: Clears 2.000 for first time in 15 years on hot CPI
??? US Dollar: CPI and housing on tap

Pound Clears 2.000 ??“ Can it Stay There?

Hotter than expected UK CPI data fueled a massive rise in the pound tonight as the currency breached the 2.000 barrier for the first time since 1992. UK CPI rose to 3.1% from 2.8% forecast on the back of large price gains in furniture, clothing and footwear as UK??™s red hot housing market is clearing putting upward pressure on consumer goods.  In his letter to Chancellor Brown explaining why the CPI rate exceeded the MPC target by more than 1%  BoE Governor Mervyn King noted that. ???Spending in the UK economy, associated with continuing rapid growth of money and credit has recovered from the slowdown in 2005.???  Tonight??™s CPI news nearly guarantees a 25bp rate hike by the BoE at the May MPC meeting with many market participants now pricing in yet another rate hike before year end.  

The inflation data proved positive for pound longs as the currency pushed through the 2.000 level erasing option barriers. However, no sooner did it break that level, cable  quickly fell back as profit taking and fresh speculative short positions kicked in.  When it hit the 2.000 figure in 1992 the currency spent only a brief amount of time at those price levels before being expelled from the ERM system.  However, today??™s price reaction is likely to be quite different.  The US economy is mired in a housing led slowdown that will  force US monetary policy to remain neutral for the foreseeable future. Meanwhile UK economic growth could produce two more rate hikes this year. As the interest rate differential between the two currencies begins to widen, GBPUSD may well remain above the 2.000 level for quite some time, especially is US data continues to falter.

In Euro zone today, the ZEW survey printed much better than expected at 16.5 versus 10 forecast. The news however was overshadowed by the developments in the pound and the euro actually sold off on the report driven by order flows in the EURGBP cross. Nevertheless, the rebound in the ZEW readings is a testament to the strength of the German economy and bodes well for further EURUSD gains as the pair targets all time highs at 1.3666 set in 2004.

Today, the US calendar contains CPI data which much like its UK counterpart could print hotter than forecast. However, the market will most likely  focus on the Housing starts and Building Permits reports. Traders will want to see if the US housing sector continues to deteriorate. Certainly yesterday NAHB reading offered little cheer to dollar longs, but if today??™s data shows a positive surprise the greenback may find some temporary reprieve from the constant selling of the past few days.