Forex: Pound to Fall if UK CPI Disappoints, Dollar Eyes Fed Commentary

Talking Points:

• British Pound Likely to Fall if UK CPI Falls Short of Expectations
• US Dollar Hopes to Find Strength in Pro-Taper Fed Commentary
• Australian Dollar Sinks as RBA Minutes Dent Case for Rate Hikes

April’s UK CPI report headlines the economic calendar in European trading hours. Expectations call for the headline year-on-year inflation rate to tick higher to 1.7 percent, marking a modest recovery from a four-year low of 1.6 percent recorded in the prior month. UK economic data has increasingly deteriorated relative to expectations since late March however, hinting analysts may be overly optimistic in their outlook and opening the door for a downside surprise. Leading PMI data has also offered some (albeit mixed) evidence of softer pricing trends in April. A weaker-than-expected outcome is likely to undermine speculation about near-term policy normalization at the Bank of England, weigh on the British Pound. We remain short GBPJPY.

Later in the day, a still-empty US economic calendar keeps the spotlight on “Fed-speak”. Philadelphia and New York Fed Presidents Charles Plosser and Bill Dudley – both current members of the policy-setting FOMC committee – are due to cross the wires. The central issue at the heart of speculation about US monetary policy is whether the central bank will continue to “taper” QE asset purchases such that the program is wound down this year, laying the foundation for a subsequent round of interest rate hikes.

Soft performance in the first quarter spread doubt among investors, sending the US Dollar lower, but the FOMC has remained steadfast in its commitment to policy normalization. Meanwhile, US economic outcomes seem to have turned a corner, with a Citigroup gauge measuring the performance of news-flow relative to consensus forecasts now at a three-month high. Against this backdrop, commentary seen as favoring continued stimulus reduction is likely to help scatter doubts about the continuity of the tapering process, boosting the greenback.

The Australian Dollar underperformed in otherwise muted overnight trade, sliding as much as 0.4 percent on average against its leading counterparts. The selloff followed the release of minutes from this month’s RBA meeting. The document revealed the central bank foresees below-trend economic growth in the coming quarters and expects accommodative policy to remain appropriate for some time. The remarks eroded bets on future interest rate, sending the Aussie lower. We have entered short AUDUSD.

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

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