GBP

Will Inflation Data Act to Tie the Hands of the BOE?

The Bank of England has an important decision to make in the coming month, at its May interest-rate decision where the Monetary Policy Committee must decide whether to continue it’s quantitative easing bond purchase program, or to pause it at its current £325 billion.

We know from the previous BOE minutes that 2 members – Adam Posen and David Miles – voted for a £25 billion increase to the QE program, but that was before a run of better-than-expected PMI reports which could give the area slightly more upbeat assessment of economic conditions.

While a strengthening economy – even relatively speaking – would be one reason to pause QE, another impediment could be inflationary pressures which may remain more stubborn than the BOE expected.

In late March we had 2 BOE members – Martin Weale and Spencer Dale – talk about the “risks that there may be more persistence to inflation” and that “inflation may not slow as fast this year as MPC forecast due to rising energy prices.” well there remain significant risks the downside footing a deterioration in Europe, elevated bank funding costs, and higher borrowing costs on consumers, will the Bank of England continue to use is nonstandard measures to try and help growth. What if that comes at the expense of heightened inflation?

Most recently the data has shown the annual CPI rate fall quite dramatically – from 5.2% to 3.4% in annual terms – but the expectation is that for March annual CPI will post a 3.5% reading. That remains far above the central banks preference for prices. The Bank of England has expected inflation to cool going forward because of spare capacity in the economy, but I wonder if it considers the diminishing returns from the each new successive round of bond buying.

On Wednesday we will get further insight into the thinking of the BOE when it releases its Meeting Minutes, at the same time that we get the latest round of data from the labor market – the Achilles’ heel of the UK economy.

But before that we anticipate the CPI data. If prices come in stronger-than-expected it could bolster the case of those committee members who do not feel more bond purchases are necessary and therefore would tie the hands of the BOE. Such a development would be a positive for the GBP other factors held equal.

If inflation cools below its level in February, then this impediment to more QE lessens. The CPI data will therefore be the curtain opener for a busy week of fundamentals for the UK economy, and can give us further insight into the direction of the GBP.

If at the end of it, we see the chances of the BOE holding its fire on more QE rising, I will be most interested in the impact on that EUR/GBP as it trades near a critical support level and if broken could open up further downside targets including the lows from 2010 (at 0.8140 and 0.8070).

FXtimes

Friday 11:00 AM With the BOJ under criticism for worrying more about the state of its balance sheet than the economy, ZH goes to the tape. Turns out, the BOJ's assets foot to nearly 30% of the Japanese economy (compared to the Fed's 19%), suggesting years of modest easing have bloated the balance sheet, but done nothing to reverse deflation. Expect the next easing to be a big one.

Comment!

[Global & FX

jpy

On Thursday, BoJ Governor Masaaki Shirakawa said the central bank was “committed” to monetary easing in order to meet Japan’s 1% targeted rate of inflation.

Also Thursday, preliminary data showed that Japan posted a record JPY4.41 trillion trade deficit for the fiscal year ending on March 31, as imports of oil and gas to produce electricity increased, with most of the country’s nuclear reactors still offline.

In the U.S., data on Thursday showed that manufacturing activity in the Philadelphia-region expanded at a slower rate than expected in April and U.S. existing home sales declined unexpectedly last month.

The data came after a government report showing that the number of people who filed for unemployment assistance in the U.S. last week fell less-than-expected, while the previous week’s figure was revised higher.

The Department of Labor said the number of individuals filing for initial jobless benefits in the week ending April 14 fell by 2,000 to a seasonally adjusted 386,000, disappointing expectations for a decline of 18,000 to 370,000.

As for the outlook for the economy, members shared the view that -- in line with

the interim assessment made in January 2012 -- Japan's economy was likely to gradually

emerge from the current phase of flat growth and return to a moderate recovery path as the

pace of recovery in overseas economies picked up, led by emerging and

commodity-exporting economies, and as reconstruction-related demand after the earthquake

disaster gradually strengthened. Many members noted that production and public

investment had recently begun to show signs of a possible pick-up in the coming period.

One of these members said that one year had passed since the earthquake and economic

activity had almost returned to the pre-quake level. The member continued that this

marked an important phase for the economy, in which the momentum for self-sustained

recovery would be tested.

AT the monent GBPUSD is near Monthly Resistance ..Howevr i will be looking to buy this pair on a pull back if i can get it

23/.4/2012

Sterling: Speculators got the sterling move right. The net short position fell to 13.1k from 18.8k as shorts were cut (2.3k) and longs were extended (3.4k). And just in the nick of time. Less dovish MPC minutes, stronger than expected retail sales report, some M&A flows and cross rate buying against the euro, helped lift sterling to new 2012 highs above $1.61 in the days that followed the end of the CFTF reporting period.

Sterling's technical tone, like the euro's, looks better than the fundamental backdrop. The UK economy has spent the past 6 quarters alternating between a small expansion and small contraction. The fourth quarter of 2011 was an contraction so Q1 12 will likely be a small expansion. It will be reported on April 25.

The fact that a new round of asset purchases is less likely than the market previously thought (though a wait-and-see attitude has been our base case) does not reflect a more optimistic assessment of the economy as much as realization that inflation remains stickier. Yet technically, the sterling can test the $1.6180 near-term, but has potential to run toward $1.6350-$1.6400.