FX & Money Markets Daily: Inflation Report From BoE

Today's Comment

Majors & Scandies

The long-awaited inflation report from Bank of England is due shortly before lunchtime today. The minutes from the MPC meeting in March lead us to suspect that the inflation report due today will point towards further cuts from BoE, but also that there are inflation concerns to address and hence rate cuts will come gradually. The last report from February pointed towards BoE cutting rates by 50bps during 2008 due to expectations of a significant decrease in growth in the short term. In addition, BoE expected a boost in inflation to about 3% in Q2/Q3 in 2008 and with falling inflation levels in H2. The British pound came yesterday under pressure as expected even though the inflation figures surprised massively on the upside. The interest rates in the short end of the curve did, however, increase significantly (20-25bps) on top of the numbers.

CPI from the US is due this afternoon and our economists are looking for a CPI figure (Ex food & energy, m/m) around 0.2%. A high figure will put a fat line under the market's expectations that the FED is done lowering rates in this cycle. Our economists are, however, still looking for two additional cuts by year-end 2008. Inflation figures from both the Eurozone and the US have received great attention the last few weeks as the central banks are deeply concerned with second round effects.

NZDUSD is currently testing the lower side of a 3-month downwards trend channel and it is likely going to be rejected due to a quite significant fall the last week or so. A rebound towards 77.30 is expected before the downturn continues. Our stop loss on EURJPY (JPYDKK) was reached during the afternoon yesterday and we adopt a neutral stance for the time being.

Emerging Markets

In directionless global markets, EM also traded without clear direction or conviction although the three high-yielders, TRY, ZAR and ISK, all gained on the soft EUR. In general, 'where to go from here?' is currently what we economists call a very good question. The latest US data has not been as weak as feared, and while we thus have been right in thinking that the April rally in risky assets would run out of steam, sentiment has turned neutral rather than negative. And as the bulk of the data giving clues as to the state of the US economy has been published recently, it seems unlikely that we will receive new impulses from that front. Hence, we bide our time, waiting for a sense of general direction. On the local stories, the TRY has continued its impressive comeback and is now up by almost 9 % since the EUR/TRY peaked in mid-April. This has mainly been driven by speculation that the central bank will embark on a tightening path at tomorrow's policy meeting, but has also been helped along by the better global sentiment and the reassuring calm on the domestic political scene. It seems unlikely that either of these factors have much more to offer for now, and we thus stick to the sidelines in relation to the TRY. As for the ISK, EUR/Isk still hovers just below 123, which is not too far from where the cross was when the central bank unexpectedly hiked by 125bps, citing the currency as one of the main reasons. Hence, there may be a feeling that the Sedlabanki has drawn a line in the sand around here and further gains for EUR/ISK will increase speculation that the Sedlabanki will act again. We think they will wait till next week's policy meeting, however, and stick to our bought EUR/ISK position for now - although we keep the stop close by.

Today's key events

• N/A Several FED members speak during the day, USD
• 11:00 Industrial Production, EUR
• 11:00 Retail Sales, ZAR
• 11:30 BoE Inflation Report, GBP
• 14:30 CPI, USD
• 00:45 Retail Sales, NZD

Jyske Core Positions - Recommendations

Jyske Markets - FX Research
http://www.jyskebank.dk/finansnyt

The analysis is based on information which Jyske Bank finds reliable, but Jyske Bank does not assume any responsibility for the correctness of the material nor for transactions made on the basis of the information or the estimates of the analysis. The estimates and recommendation of the analysis may be changed without notice. The analysis is for personal use of Jyske Bank's customers and may not be copied.