FX news and analysis 16th Mar

USD

The dollar fell on Friday after a lower-than-expected print for core CPI dealt a blow to hopes of more hawkish Fed policies and higher yields. Rising oil prices were blamed for the rise in CPI whilst a fall in CPI ex food and energy revealed that underlying inflation was falling. Whilst annualized CPI (Feb) come out in line with expectations of 2.9% rise, which was the same as the 2.9% print in January; CPI Ex Food and Energy showed a dip from the previous month falling by a basis point to 2.2%; also Ex Food and Energy MoM fell below expectations to 0.1% vs 0.2% forecast; although CPI MoM rose by 0.4% vs 0.2% previous. Data for Industrial Production also weighed on the dollar after it rose by 0.0% in February when expectations had been for a 0.4% rise. Another important metric – Michigan Confidence, which measures consumer confidence, also undershot expectations with a print of 74.3 vs 75.6 expected and 75.3 previous. Overall the slightly below-par may have been an excuse for traders to take profit after the recent strong dollar rally. The lower CPI reading may have brought into question Federal Reserve Official and arch-hawk Jeffrey Lacker who had said recently that rates might rise next year, when previous Fed rhetoric had been for the maintenance of ultra-low rates until 2014.

EUR

The euro traded mixed on Friday, falling against the dollar after a lower than expected U.S core CPI curbed expectations of a change in Fed policy to more hawkish monetary policy stance; but rising against the yen which continued to weaken on increased expectations of more BOJ easing. Against the pound, the euro fell as investors continued to have faith in the U.K government's ultra-tough austerity programme, despite underlying growth fears. On the data front, Euro-zone Trade Balance (Jan) showed a deficit of -7.9bn when a -3bn deficit had been expected and the previous month had shown a surplus of 9.1bn. The seasonally adjusted figure gave a 5.9bn surplus – a basis point below the expected result and below the 7.4bn surplus of the previous month. Italian Trade Balance (Jan) meanwhile showed a surplus of -4350m vs 1150m previous, whilst the Italian Current Account showed a gaping deficit of -7593m in January vs 402m in the previous month of December.

GBP

The pound rose strongly on Friday after the dollar weakened and fell from its recent 6-week highs. Sterling rose against the yen, however, which remained under pressure due to many factors but foremost the ultra-loose monetary policy outlook for the BOJ; whilst against the euro the pound also strengthened as a result of relatively poor trade data for the euro-zone and because of the U.K's stronger government record on austerity. Despite making headway today, the pound still faces headwinds, including growth concerns and expectations of further central bank quantitative easing (QE). Recent poor employment and Industrial Production data failed to dispel expectations of further QE, probably in May. Today's robustness had more to do with the 'least ugly' effect, than intrinsic strength in sterling. With the dollar looking the stronger overall cable remains under pressure, in the mid to long-term anyway. BOE minutes next Wednesday will be the focus for traders in the coming week.

JPY

The yen traded mixed on Friday, it rose against the dollar after a long run of lowing days after U.S core inflation came out under expectations, leading to a reassessment of the recent more hawkish outlook for Fed policy. The yen continued to fall versus the euro, however, as its own central bank's ultra-loose policies stood in contrast to the ECB, which in its recent monthly report expected inflation to remain slightly above its 2% target. The yen also weakened versus commodity currencies after traders sold it to fund carry trades in higher yielding currencies. Continued deflation combined with a 1% inflation target has led the BOJ to embrace more monetary easing and rates are expected to remain low for the foreseeable future leading to more yen selling and probably further weakness. On the data front the Leading Index (Jan) fell 5 basis points to 94.4 and the Coincident Index (also Jan) fell to 92.7 from 93.1 previous.