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Tuesday April 17, 2007 - 11:09:46 GMT
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Forex Research - Mellon FX Daily - U.S. Edition

Mellon FX Daily 06:45 EDT

Key Points
• Strong CPI data pushes cable through 2.00.
• JPY overnight recovery could extend further initially, but JPY crosses likely to be supported.
• EUR-USD steady despite strong ZEW.
• US CPI, housing starts and ind prod feature today. NZ CPI due this evening.

Market Outlook

GBP has been in the spotlight again in Europe this morning, with a much stronger than expected CPI report pushing cable above 2.00. The y/y rate on CPI rose to +3.1% from +2.8%, with the breach of the 3% level meaning that BoE governor King was forced to write a letter of explanation to the Treasury stating why there has been a 1%-plus deviation from the 2% target. The letter was released an hour after the CPI number came out and noted the factors behind the latest rise (furniture and food prices) and the likelihood that the y/y rate would fall back over coming months, especially with utility prices set to weigh heavily on the y/y rate calculation in Q2. King also said that policy was aimed at looking through such m/m volatility in the CPI data, but as part of their May Inflation Report they would be discussing whether the latest data was evidence that prior upside inflation risks were now materialising.

Indeed, yesterday’s strong PPI output data will have been cause enough for the MPC to retain concerns about medium-term inflation pressure, which policy is primarily focussed on. A May rate hike is pretty much a done deal and the market is now moving towards discounting another move in August (Sep short sterling is at 5.95% compared to 5.85% yesterday). A further hike after May is unlikely to be necessary, but the market will retain such a suspicion until there is evidence of some weakness in PPI and/or signs that previous rate hikes are starting to have an impact on consumer spending.

We remain sceptical about the likely ability of cable to sustain territory above 2.00, but further upside testing looks likely in the short-term and the 2.0115 high from September 1992 will be the main target and resistance point. If that level breaks, cable will be back to an area not seen since 1981.

Most markets have been on the defensive a little overnight, with Asian markets failing to add to the gains seen yesterday and the JPY and the CHF strengthening. A further pullback in the JPY crosses could yet be seen today, although ultimately there is likely to be good support on any dips with yesterday’s strong equity gains suggesting that overall investor sentiment remains positive. The strength in GBP seen in Europe also appears to have weighed on the JPY in general.

EUR-USD progress remains steady and while an upside bias remains in place overall, a pullback to 1.3450-60 is feasible in the very short-term. Strong ZEW numbers had little sustained impact. Yesterday’s US retail sales numbers were fairly decent, although the soft NY Fed number will maintain the impression that all is not well in manufacturing. However, the data is still not weak enough to warrant any policy easing and this will maintain some support for the USD. A recent positive for the EUR has been the steady firming in ECB rate expectations over the past month or so. Since the rate hike in early March the Euribor future for Dec has firmed 28bp to 4.34%. While the risks remain clearly to the upside for ECB rate expectations, much of the move may have been seen for now.

Day Ahead
US – CPI, housing starts, building permits and industrial output are due. Key focus today will be whether the more subdued +0.2% outcome seen last month on core CPI can be repeated. Housing starts bounced back sharply in Feb, although this was only after the very steep fall recorded in January. However, given the way other March releases are panning out (employment and retail sales strength suggesting seasonal distortions for Feb) there may have been a further uplift in March, or an upward revision to February.

New Zealand – CPI for Q1 is released tonight and the more subdued y/y rate of +2.6% seen in Q4 is likely to have been maintained. However, the RBNZ is looking beyond the current softness in the headline y/y rate to overall medium-term inflation pressure and it seems unlikely that such concerns will be assuaged by this data. Last week’s very strong retail sales data will help maintain expectations of the need for another rate hike.

Data/event EDT Consensus*

US Chain store sls (w/e Apr 14) w/w 07.45 +0.9% last
US CPI (Mar) m/m 08.30 +0.6%
US CPI core (Mar) m/m 08.30 +0.2%
US Housing starts (Mar) m/m 08.30 1495k
US Building permits (Mar) m/m 08.30 1500k
US Fed’s Plosser spks on econ 08.30
CA Manu shipments (Feb) m/m 08.30 +0.2%
US Redbook sls (w/e Apr 14) m/m 08.55 +1.0% last
US Ind prod (Mar) m/m 09.15 +0.0%
US Capacity utilisation (Mar) 09.15 81.9%
EU ECB’s Trichet speaks 11.00
US Fed’s Geithner on USD & EUR 12.30
US ABC consumer conf (w/e Apr 15) 17.00 -7 last
NZ CPI (Q1) q/q 18.45 +0.6%
NZ CPI (Q1) y/y 18.45 +2.6%
AU Consumer sentiment (Apr) m/m 20.30 +3.7% last

Latest data Actual Consensus*
US NAHB index (Apr) m/m 33 35
JP Consumer confidence (Mar) 47.2 47.8
GB CPI (Mar) y/y +3.1% +2.8%
GB CPI core (Mar) y/y +1.9% +1.8%
GB RPIX (Mar) y/y +3.9% +3.7%
GB RPI (Mar) y/y +4.8% +4.6%
EU Trade balance (Feb) m/m -€0.2bn €0.6bn
DE ZEW expectations (Apr) 16.5 10.0
EU ZEW expectations (Apr) 10.7 8.0
* 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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