Forex: Pound May Fall on Soft UK CPI, Euro to Look Past IFO Downtick

Talking Points:

• Euro May Weaken on IFO Survey But Follow-Through Likely Limited
• Soft UK CPI Report May Erode BOE Policy Outlook, Weigh on Pound
• Aussie and NZ Dollars Rise, China Fiscal Stimulus Bets Possible Driver

Germany’s IFO Survey of business confidence is expected to reveal the first decline in sentiment in five months. The headline Business Confidence index is forecast to tick down to 110.9 in March having hit the highest level since July 2011 at 111.3 in the prior month. A downbeat reading may apply near-term downward pressure on the Euro, particularly if it is shown to reflect disappointment in the ECB’s inaction despite persistent disinflation and sliding price growth expectations (as priced into bond yields). Follow-through may be limited however considering the outcome’s limited implications for near-term monetary policy as Mario Draghi and company wait for the outcome of the Asset Quality Review (AQR) before making their next move.

Meanwhile, February’s UK CPI report is expected to see the headline year-on-year inflation rate ease back to 1.7 percent – mark the lowest result since October 2009 – from a reading of 1.9 percent in January. Last month’s revision of the Bank of England’s forward guidance framework refocused policy on “absorbing spare capacity”, a process that implies a pickup in inflationary pressure. With that in mind, a soft CPI print may translate into speculation that a move to normalize monetary policy may be relatively more distant than implied by the priced-in status quo. Needless to say, such an outcome bodes ill for the British Pound as prices test critical chart support.

The Australian and New Zealand Dollars narrowly outperformed in otherwise quiet overnight trade. The move may have followed the publication of commentary in the China Securities Journal – a publication sponsored by China’s official Xinhua News Agency – that alluded to possible fiscal stimulus on the horizon. The Journal likewise argued that the East Asian giant will not see a free-fall in economic growth, with output expansion readings likely to be in a tight range. This resilience was chalked up to a significant contribution from consumption and a possible improvement in overseas sales. China is Australia and New Zealand’s largest export market, meaning pro-growth policy there may carry positive spillover effects and promote currency-supportive RBA and RBNZ expectations.

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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