Dollar Pulled Lower As Pound Fills The Gap

Market Drivers January 17, 2017

• Dollar weakness sends USD/JPY to 113.00
• UK Inflation hotter
• Nikkei -1.48% DAX -0.69%
• Oil $53/bbl
• Gold $1216/oz.

Europe and Asia
GBP: UK CPI 1.6% vs. 1.4%
EUR: GE ZEW 16.6 vs. 18.3
EUR: GE ZEW Current Situation 77.3 vs. 65.0

North America
USD: Empire Manufacturing 9:30

It's been an active night of trade in Asia with cable staging a furious short covering rally that helped the pair fill the gap from the weekend open. However, sterling ran out of momentum ahead of the 1.2200 figure and dropped back below 1.2150 by mid-morning trade.

On the economic front, UK inflation came in mixed with headline readings continuing to rise as the data printed 1.6% versus 1.5% eyed on a core basis but PPI was surprisingly subdued at 1.8% versus 2.5% forecast. The biggest rise came from food and airfares, but overall inflation data remains contained, especially in light of a much weaker pound.

The eco news of course will be pushed to backstage as all eyes today will be on Prime Minister May's Brexit speech. Ms. May is expected to push for a hard Brexit, seeking to extract UK from the European Union even at the cost of single market access. The speech has been leaked to UK press so much of the news has been priced in, thus the sharp drop on the Monday open.

In fact if Ms. May's rhetoric proves softer than the expectations, GBP/USD could pop above the 1.2200 figure on "sell the rumor buy the news" dynamic, but there is no doubt that cable continues to feel the pressure from Brexit woes. One possible factor that could derail the whole Brexit project is the expected ruling by the UK Supreme court. Most experts believe that the court will insist on a Parliamentary vote to ratify the referendum which could mean delay at the very least and reversal of the policy if Parliament refuses to confirm the referendum.

For now the market is ignoring any prospect of a Parliamentary delay, but once Ms. May's position is fully known that could be the next event that cable traders will focus on.

Elsewhere, the turn in the pound quickly morphed into a broader selloff in the dollar with USD/JPY dropping to 113.00 in overnight trade, while EUR/USD came close to the 1.0700 figure.

There is little on the economic docket today, but with US rates now below 2.35% yield on the 10 year, the buck has lost a lot of its momentum, essentially correcting its rally since the start of the year. At these levels however USD/JPY is now coming into some bargain territory for longer term shorts and the pair could stabilize and stage a rally back to 115.00 level over the near term horizon.