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Thursday April 20, 2006 - 09:14:59 GMT
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Forex: Mellon FX Daily - European Edition

• US core CPI is not necessarily representative of actual price pressures…
• …but USD weakness may be restrained in any case ahead of next Thursday’s testimony from Bernanke.
• CPI data due for UK, Eurozone and Canada – US Philly Fed and jobless claims feature today.

Market Outlook
EUR-USD was eventually able to shrug off the stronger than expected US core CPI number yesterday, with the belief about an impending peak in US rates still a powerful one. Furthermore, the fact that +0.3% numbers were recorded for March core CPI in each of the past two years also suggests some possible seasonal adjustment problems with the data, while the highly weighted (23.4% of total) owners-equivalent rent component (a strong +0.4% m/m) does not feature in the Fed’s favoured measure of core inflation – the core PCE price index. A strong core PCE price number therefore seems unlikely.

However, as was the case yesterday, the EUR-USD gains seen in the US have not been built upon overnight, suggesting that many are cautious about pursuing USD weakness aggressively. One of the reasons for this, apart from the minor question marks raised by the CPI data, is the need for confirmation from the Fed and critical events are forthcoming in this regard over the next few weeks. The next FOMC meeting is on May 10 but on the immediate horizon (next Thursday) is Bernanke’s testimony on the economy before the Joint Economic Committee.

It seems unlikely that he will use such an occasion to say anything controversial, but it is nevertheless an opportunity to signal intentions about the next FOMC meeting if he has the support of his members to do so. The FOMC does of course talk on a more regular basis than the formal policy meetings. Alternatively, he could retreat into ‘central bank speak’, offering a fairly equivocal interpretation of the current situation and this may come across as not overtly supporting a dovish view. Overall, the uncertainty over this event may just restrain EURUSD upside (still favoured in general over the coming month), although there will be room for influence from the data releases between now and Thursday (Philly Fed, jobless claims today and new/existing home sales, consumer confidence and durable orders next week).

Day Ahead
UK – CPI data will need to be unusual to affect market expectations about MPC policy. Headline CPI was at 2% last month after 1.9% in each of the two months before that, while core CPI edged up to +1.4% last month from +1.2%. The market is looking for a further advance in the core y/y rate but 2% will need to be threatened before the market gets really worried.

Eurozone – CPI data is due and while the core y/y rate has been soft for sometime the ECB has largely overlooked this in its pronouncements on inflation risk. Compared to some other central banks like the Fed and the MPC they put far more weight on the headline CPI number, owing to its importance in wage negotiations. However, even the headline CPI number has eased off a little over the past few months.

Canada – CPI is also out in Canada, but the remarkable stability in the core CPIX measure has meant that the market has not moved on this data for some time. The core CPIX y/y rate has been either +1.6% or +1.7% in each of the past seven months. A USD-CAD move towards 1.1300 still seems likely. Retail sales data is due tomorrow.

US – the Philly Fed survey and weekly jobless claims data features today. The Philly Fed has been showing some moderation in recent months, while initial claims appears to have settled around levels consistent with a modest improvement in the labour market compared to late last year.

Japan – activity indices are out tonight and the market is looking for a pullback after last month’s strong showing. The data is unlikely to affect market perceptions about rising trend activity in Japan.

Data/event EDT Consensus*

IT Consumer confidence (Apr) 08.30 109.0
IT Ind orders (Feb) y/y 09.00 +9.8%
GB CPI (Mar) y/y 09.30 +2.0%
GB CPI core (Mar) y/y 09.30 +1.5%
GB RPIX (Mar) y/y 09.30 +2.3%
GB RPI (Mar) y/y 09.30 +2.4%
EU CPI (Mar) y/y 10.00 +2.2%
EU CPI ex-energy/fresh food (Mar) y/y 10.00 +1.3%
CA CPI (Mar) y/y 12.00 +2.1%
CA CPIX (Mar) y/y 12.00 +1.6%
US Initial claims (w/e Apr 15) 13.30 308k
US Continuing claims (w/e Apr 8) 13.30 2439k
US Lead indicators (Mar) m/m 15.00 0.0%
US Philly Fed index (Apr) 17.00 14.0
JP Tertiary index (Feb) m/m 00.50 -1.1%
JP All-industry index (Feb) m/m 00.50 -1.1%

Latest data Actual Consensus*
JP Trade balance (Mar, sa) ¥698bn ¥572bn
CN CPI (Mar) y/y +0.8% +1.3%
CN PPI (Mar) y/y +2.5% +2.9%
* Consensus unless stated

2005, Mellon Financial Corporation Note: Although obtained from sources believed by us to be reliable, Mellon Financial Corporation and its affiliates cannot guarantee the accuracy or completeness of the information upon which this report is based. This report does not purport to disclose the risks or benefits of entering into particular transactions and should not be construed as advice in any specific instance. The views in this report constitute our judgement as of this date and are subject to change without notice.
Ian Gunner 44 20 7163 5996 06.40 EDT Monday May 31 2005


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