UK inflation moderates

Morning Comment         

Current mid-market inter-bank spot rates (as at 07:30 GMT) 

Major sterling

Major US$

Sterling emigrate

Other sterling

Euro crosses

Data / Events due today 

Fundamental

Sterling lost a little ground yesterday morning as inflation surprisingly moderated on both headline and core readings. Year on year, inflation fell to 2.4% in June from 2.8% previously, its lowest level since November 2009 while the core measure also fell to 2.1% from 2.5% in May. Clothing and footwear, down 4.2%, was the biggest influence in the decline. The data increases the prospect of additional monetary stimulus from the Bank of England with inflation seemingly less of a concern.

The latest German ZEW investor sentiment survey was marginally better than anticipated at -19.6 but still a third consecutive decline. A Eurogroup conference call has been scheduled for Friday with Spain’s bank lending program the topic of conversation. They will have been encouraged by a well received bond auction in Spain where the yield fell from just over 5% in June to just under 4% this time around. Italy, or more specifically Sicily, is back in the spotlight with PM Monti concerned over a potential default by the region.

As expected, it was left to Fed Chairman Bernanke to provide the catalyst for a real market move and he didn’t disappoint in that regard. Where he did disappoint investors was in noting QE poses risks and should not be used lightly. Those expecting a more dovish commentary were left licking their wounds as the dollar rose sharply. However, once the dust settled, there was a realisation that nothing has changed from the Fed’s perspective. Additional stimulus measures may still be used in the right circumstances and the dollar quickly returned to pre-speech levels.

Ahead today, Bank of England minutes take centre stage this morning although yesterday’s inflation data may override if inflation was seen as a problem at the meeting earlier in the month. The UK unemployment rate is expected to hold steady and from there attention will swiftly switch back to Fed Chairman Bernanke as he follows up on yesterday’s testimony. This evening, the Fed Beige Book will give current insight into the various regional outlooks.
 

Technical  

£-usd 

The pound fell gradually during European hours before a sharp decline mid-afternoon tested 1.5570/35 support. This latter move was quickly reversed and we open today close to yesterday morning’s levels. Upside momentum is picking up on a daily timeframe so we may yet see 1.5690/1.5700 succumb which allows for a test of 1.5720/25 initially then the stronger 1.5750/85 area. Only beyond here substantially undermines the bear trend from 1.63 which began at the end of April. Support today at 1.5570/55, 1.5535, 1.5500, 1.5460 and 1.5395/90 protect the 1.5270 low from the beginning of last month.  

£-eur  

Sterling again fluctuated around the important 1.2750 level and for the second day running failed to gain a meaningful foothold north of this pivot point. Upside momentum is beginning to show signs of fatigue so if we see a push below 1.2690 today it could prompt further selling towards 1.2635 and 1.2580/75. Resistance still at 1.2750/70, 1.2830/75 and 1.3000/25. 

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