Capital Markets: "Greenback is Firm, While Soft Inflation Drags Sterling from Perch"

From Marc to Market:

The US dollar is enjoying a firmer tone against major and most emerging market currencies. Sterling, which has become a market darling, hit an air pocket after softer than expected CPI.

UK headline CPI rose 0.1% in March, while the market expected a 0.3% increase. The recently introduced preferred measure, CPIH slipped to 2.3% from 2.5%, the weakest in a year. The core rate unexpectedly eased to 2.3% from 2.4%, while the market anticipated a 2.5% increase. Input and output prices for producers were softer. With earnings growth above the inflation, a BOE rate hike next month is still the most likely scenario. That said the high earnings and lower inflation are not expected to boost March retail sales, which will be reported tomorrow. The median forecast calls for a decline in retail sales, according to the Bloomberg survey.

Sterling had reached its highest level since the 2016 referendum yesterday as it approached $1.44. It had traded $1.50 on the day of the referendum. On the back of today's news, sterling, which had already been trading off in the face of the broadly firmer US dollar, traded to $1.4175, where bids were found. These losses brought sterling to near the 50% retracement (~$1.4170) of the last leg up, which began after sterling dipped below $1.40 on April 5. The 20-day moving average is found near $1.4140, and the 61.8% retracement is just below $1.4125.

The euro was trading near GBP0.7800 before the referendum.The recent slide in the cross saw the euro trade near one-year lows against sterling (~GBP0.8620) yesterday before recovering smartly today through GBP0.8700. The euro had put in a bullish hammer candlestick at the end of last week, suggesting that a bottom was at hand, but it took today's CPI report to solidify it. It tested the 20-day moving average (~GBP0.8720) and has not closed above it in a month.

Meanwhile, the UK faces another challenge. The House of Lords will take up the "Withdrawal Bill" today. There is a risk that it insists on staying the customs union. The bill was delayed in the House of Commons when it appeared that the government's intention to withdraw from the customs union faced a likely defeat....MORE