Wednesday, March 26, 2014

US economic events to have more impact | Soft UK inflation and Sterling

Today sees the release of the monthly Durable Goods report in the USA, which will be watched for confirmation, or otherwise, that the economy there is on track to recovery and that softer indicators in recent months were indeed the result of extreme weather Stateside.

Yesterday, US Consumer Confidence came in at a level not seen since before the Global Economic Crisis, so there will be disappointment in the market if this positivity is not reinforced in other measures.

There is every reason to believe that measurements such as Durable Goods Orders will take on more significance in the future than they have had in the past, given the FOMC commitment to broaden the range of indicators on which they will decide policy. Up to now the employment reports have in a real sense been the only show in town in this regard. We will have the Non Farm Payrolls report for March next week so it will be instructive to see how much the market has taken the Committee’s words to heart. The NFP report normally results in the Forex and other markets behaving like a chicken with its head cut off. Will that be that case this month?

Low inflation not good for Sterling

The inflation rate in the UK, released yesterday, has fallen to a level not seen since four years ago. At 1.7% annualized it is, while soft, well above that pertaining in the EU, where they are worried about deflation, the phenomenon that led to Japan’s “lost decade” in economic terms. When inflation turns negative, people and businesses have an incentive not to purchase anything that is not essential.

That said, the soft Consumer Price Index (CPI) in the UK, which is the measure of inflation, means that the Bank of England now has less reason to raise interest rates in the near or intermediate future. This will impact on the value of the pound and means that we will have to look carefully at taking a long position here just at the moment. Recent growth indicators in the UK have been good. When and if this fact results in inflation, interest rates will go up and so will Sterling.

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