Yesterday we had inflation figures out of the UK, and they showed a decline. The core Consumer Price Index (CPI) year-on-year fell to 1.2%, from 1.5% previously. Even residential property showed a significant drop from what had been a strong surge of growth.
All this should have been a negative for the Pound but the market seems to have taken the view that, as average prices are falling across the board globally, the result could have been worse. “In the valley of the blind, the one-eyed man in king”, participants seemed to say, and bid Cable (GBPUSD) up accordingly. They could also be acknowledging, at last, that lower energy prices, which are the main drivers of the CPI figures, are a net positive for the British economy.
In fact, GBPUSD has been trying very hard for some time now to carve out a bottom. After yesterday, we are looking at a bullish engulfing candle on the daily chart, the possibility of a series of higher highs and higher lows (which define an uptrend) and, even, a nascent inverted head and shoulders pattern, if one looks hard enough (see chart above). But the pair has done all of that before, without anything in the way of follow-through. Today’s FOMC statement and press conference has the strong potential to influence the way this particular story plays out.
All of the above, of course, must be considered in the context of possible end-of-year squaring-off of accounts by the larger Forex players.
Today is Fed day
Today is the last significant day for market events before the Christmas and New Year holiday. There will be UK employment statistics, the release of the Bank of England minutes from its last monetary policy meeting, and inflation data from the Eurozone. But the biggie is the US FOMC interest rate decision and monetary policy statement, which will be released late in the day in GMT terms, at 7:00 PM. On this occasion the Chair of the FOMC, Janet Yellen, will give a press conference afterwards.
The words in the statement the market is looking out to hear, or not hear, are “considerable period”. This formula has been used to signal that the market need not worry about interest rate rises until after about six months have passed from the time the phrase is discontinued. If it fails to appear today, it will give the clearest signal yet that core rates are on track to begin to rise in the US around the middle of 2015. This prospect has already been priced into the market for those pairs that involve the US dollar, at least to some extent. It is also responsible, along with a number of other factors, for the Carry Trade unwinding that has reduced the value of many commodity currencies, e.g. the Aussie dollar, the slump in a number of emerging market currencies and the profound problems that are besetting the Russian Rouble.