GBP/USD traded higher yesterday. A lack of negative UK news, and with little on the calendar today, we could see GBP remain biased to the upside into the weekend. But with the market keeping an eye on the UK budget and BoE MPC minutes to the March meeting next week, Lloyds TSB think GBP is limited on the upside and the 1.52 area looks difficult to break for now.
Data out this morning will likely confirm that euro area HICP fell below the ECB’s 2% ceiling for the first time in over two years, a further indication that inflation risks are skewed to the downside. Although the ECB decided to leave its becnhmark interest rate on hold at 0.75% this month, low inflation combined with the weak employment data released yesterday, will likely reignite a debate around a further cut when it next meets in April. EUR/USD remained its downside bias yesterday, making a new year low of 1.2911. The EU Summit continues today, while we could get some headlines we doubt there will be anything significant that would trigger much market reaction. However, the extraordinary Eurogroup meeting this afternoon could be a focus, discussion will be on a Cyprus bailout; the details are yet to be finalised, question marks remain over how depositors and senior debt holders will be treated. Any talk of either being ‘bailed-in’ will be EUR negative; however this looks unlikely at this point.
Higher gas prices probably drove US CPI up by 0.4% m/m (1.7% y/y) in February. Retail gas prices were up by 10.6% m/m, according to Department of Energy data. A sharp rise in crude prices, better weather in certain regions, refinery constraints due to environmental blending issues, and maitenanace switch over effects from winter to summer blends, have all been cited reasons for the pick up. These pressures are likely to ease in coming months. Meanwhile, core CPI data are anticipated to have risen by a more modest 0.1% m/m (1.9% y/y). US data has surprised on the upside recently and Wednesday’s stronger than expected retail sales data is no exception. We expect industrial production for February at an above consensus 0.5% m/m, driven in part by stronger utility output due to cold weather, but surveys also point to a rise in manufacturing output. The Empire manufacturing survey is expected to fall slightly to 9. 0 in February, while Michigan Consumer sentiment is forecast to post a sharp rise to 79.1 for March. While the impact of the sequestration is yet to be seen, Q1 GDP forecast for the US are stewed to the upside. This is likely to be noted by the Fed at next week’s FOMC meeting, although a change in policy is very unlikely at this point. US Long-term investment flow data for February is also due out today.
The USD index made a new high of 83.17, the highest level since August 2012, before retreating lower. US data this afternoon will be of interest as it is expected USD to continue to benefit from better domestic. US CPI, industrial production and confidence indicators will be a focus. U. of Michigan and Empire state manufacturing survey will provide the first set of indication of sentiment in March but are expected to be mixed.
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