The Pound reversed direction on Tuesday and almost killed a stronger anticipated rally as low inflation numbers dominated over one of UK biggest M&A deal.
After several rejections, SABMiller finally accepted the £68 bn takeover offer by AB InBev. A deal that would bring a decent amount of pound inflows into the UK, which in turn boosted GBPUSD towards 1.5387, the highest level in 3 weeks. Not much longer consumer prices in the UK were released and unexpectedly turned into negative territory for the second time since 1960 causing a steep selling in the currency against its major counterparts.
Governor Carney mentioned last week that the exact timing of the Fed move is not decisive for BoE, making the point that in the five rate cycles since UK adopted inflation targeting, the BoE moved before the Fed in two of them putting an end to the discussion that BoE is waiting for the Fed's to make the first move. However, with yesterday’s inflation numbers it is very unlikely to see BoE moving soon and forward contracts suggests a full 25 basis only to come buy end of next year.
For traders who are asking whether the GBPUSD peaked in the short term would probably need to look at today’s labour data. Last month British wages grew at the fastest rate in 6 years and if this trend continues, it would be only a matter of time till we see inflation returning and a boost in GBPUSD towards yesterday’s high of 1.5387 is very likely.
The Aussie continues to be the worst trading G10 currency for a second day although Australian consumers are feeling more confident as todays Westpac-Melboune Institute index of consumer confidence showed. AUDUSD dropped for a second day as Chinese data continues to disappoint. Although yesterday’s China’s trade balance beat expectations coming at $60.34 bn vs $46.79 bn forecast, when looking into the details it was very slow imports driving the figure higher. Imports dropped by 20.4% reinforcing views that the world’s second largest economy is still losing momentum and urging for further stimulus. Inflation in China also cooling further with producers prices declining 5.9% from a year ago and consumer prices growing at only 1.6%. Traders should also remember that Reserve Bank of Australia will not like the idea of their currency appreciating and a rate cut may happen at any of the next two meetings keeping the AUDUSD under pressure, so any rally towards 0.75 could create selling opportunities for the pair.
The EURUSD rally from 1.11 to 1.14 seems to be losing momentum, although the pair trading above 1.14 at the time of writing the report. The single currency could face selling pressure at 1.1450 – 1.15 as selling interest could be found at these levels and the currency is only gaining on Dollar weakness, not on fundamentals. Eurozone industrial production is due to release, and production level expected to drop by 0.5% in July from +0.6% in Aug. With continued disappointments in Eurozone economic figures the ECB will be urged to top up his QE program and provide more signals toward extending it towards 2017.
US retail is todays biggest moving event for the Dollar, especially the disappointing Nonfarm payrolls last month. Slower job growth with slower wage increases could potentially impact consumer spending which is a major indicator followed by the Fed to assess the health of the economy. If numbers surprised to the upside “above 0.5%” the Dollar could reverse most of it's last two weeks losses.