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Forex Research - Mellon FX Daily - U.S. Edition

Mellon FX Daily 06:45 EDT

Key Points
• Recent upside GBP momentum boosted further by CPI data.
• EUR-USD consolidating above last week’s breakout point.
• Tomorrow’s FOMC statement awaited, although this may fail to deliver dramatic softening in language.
• JPY remains soft on further improvement in global markets. BoJ leaves rates unchanged.
• AUD pulls back after brief foray above 0.80.
• Canadian CPI, US housing starts, building permits and weekly consumer sentiment feature today.

Market Outlook

GBP has been the main performer in Europe this morning, with a slightly stronger than expected CPI being the catalyst for the move. However, this is the direction in which the GBP bias has been developing in any case over the past couple of days, with key support at 0.6820 on EUR-GBP being tested earlier today before CPI. A softer JPY and hopes of a more business friendly UK Budget have also been helping GBP. 0.6820 support was taken out promptly in response to the CPI data and EUR-GBP has continued falling since then (low of 0.6789) with the move also being helped by the GBP-JPY break back above 230.

On the face of it, the CPI report was not that strong, at least on the main CPI and core CPI measures – the former up slightly to +2.8% from +2.7% and the latter unchanged at +1.7%. Note also, that the main CPI y/y rate is set to fall significantly during Q2 as the base effects relating to last year’s strength in food and utility prices kicks in. The one strong stand out element of today’s data was the sharp rise in the headline RPI y/y rate to +4.6% (highest since August 1991) from +4.3%, as this will aggravate fears about possible knock-on effects to higher wage growth. However, it should be noted that wage strength has yet to materialise, so while this data will reinforce the MPC’s focus on the wage data, it shouldn’t really change the current rate profile discounted by the market.

In the near-term, EUR-GBP has some scope to 0.6765 and if this were to break there would be risk down to 0.6690. Next resistance on cable is at 1.9610. However, ongoing GBP strength will also depend upon what happens to global markets and the JPY, as well as tomorrow’s Budget, and while things certainly look good at the moment they could yet turn sour.

EUR-USD is still consolidating after last week’s break above 1.3260 and USD-JPY is slightly firmer due to further tentative gains in Asian equity markets and an unchanged BoJ policy outcome. The latter was of no great surprise and the remarks made by Fukui do not add that much to the policy debate, although the fact that he said that the BoJ must also keep an eye on land prices (were there are some modest signs of acceleration) and exchange rates, adds a slightly different dimension to BoJ watching. Otherwise, he merely reiterated that rates will be raised only gradually, that core CPI could turn negative in Feb and Mar and that consumer spending seemed to pick-up in January.

By and large the JPY will continue to trade in line with global markets i.e. stronger global markets, weaker JPY and vice versa, although major movements look unlikely today with tomorrow’s FOMC statement still outstanding. There is a clear risk that the latter will fail to deliver a major softening in policy rhetoric. The main focus today will most probably be on the US housing data (see below for preview) as the strength or weakness of these numbers will have the potential to affect sentiment towards both the sub-prime mortgage issue and tomorrow’s Fed statement. Yesterday’s NAHB housing index slipped back to 36 from a revised 39 (originally 40) for February. The near-term technical bias remains to the upside on EURUSD with 1.3260-plus territory being maintained, although the Dec 4 high at 1.3367 should hold it for now and further advances could prove difficult unless there is some weaker data or the Fed softens its language.

The AUD strength seen late yesterday (including a move to 0.8030) was frustrated by the brief period of USD strength seen early on in Asia (moving back to 0.7962 at one point). However, it is back close to 0.80 at the time of writing and looking strong. The risks are clearly growing of a break above 0.80, although it is not clear that this will be able to proceed smoothly unless there is some further generalised USD weakness and this may well depend upon tomorrow’s Fed statement. The price action is probably the best guide and any move above 0.8030 would probably spur some buying in the short-term. If a foothold can be established above 0.80 it may also trigger some hedging activity by Australian holders of foreign assets as well as exporters. With 0.80 having held the AUD for a number of years, many will have previously taken the view that hedging is not required, but this could change dramatically if a foothold above 0.8000 is established. Below 0.7960 and 0.7930 would significantly undermine short-term upside prospects.

Day Ahead
Canada – CPI is due in Canada, although with core CPI having been reasonably steady of late around 2%, it will need to be dramatic to attract any interest.

US – more housing data due today in the form of housing starts and building permits. Housing starts weakened sharply in January, falling to their lowest level since 1997 and on the basis of purely statistical considerations a rebound seems likely. Indeed, if this fails to materialise it would suggest gross underlying weakness. Building permits have been trying to stabilise over the past few months, but remain at levels not seen since 2000-2001. Weekly data on store sales and consumer sentiment are also out. Last week’s consumer sentiment number rose to a 5 ½ year high.

Data/event EDT Consensus*

CA CPI (Feb) y/y 07.00 +1.6%
CA BoC core CPI (Feb) y/y 07.00 +2.1%
US Chain store sls (w/e Mar 17) w/w 07.45 +0.7% last
US Housing starts (Feb) 08.30 1450k
US Building permits (Feb) 08.30 1550k
US Redbook sls (w/e Mar 17) m/m 08.55 +0.2% last
US ABC consumer conf (w/e Mar 18) 17.00 +2 last
JP Market Holiday

Latest data Actual Consensus*
JP BoJ rate announcement unch unch
DE PPI (Feb) y/y +2.8% +2.8%
IT Ind orders (Jan) m/m -2.1% -0.5%
GB CPI (Feb) y/y +2.8% +2.7%
GB CPI core (Feb) y/y +1.7% +1.7%
GB RPIX (Feb) y/y +3.7% +3.5%
GB RPI (Feb) y/y +4.6% +4.3%
GB PSNCR (Feb) £1.9bn £2.0bn
GB M4 (Feb) y/y +12.8% +12.8%
GB M4 lending (Feb) y/y +14.4% +14.7%R last
GB BBA mortgage lending (Feb) +£5.2bn +£5.6bn last
* 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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