Dire UK CPI Inflation Data Triggers Talk of More British QE, Sending GBP USD Rate Lower

19 Jun 2012 at 10 AM - Written by Minesh Chaudhari

STORY LINK Dire UK CPI Inflation Data Triggers Talk of More British QE, Sending GBP USD Rate Lower

Last night saw a disappointing showing for Asian equities markets following leading credit ratings agency Fitch’s announcement that it is downgrading its outlook for India’s giant economy to ‘negative’. The development saw both the Tokyo and Hong Kong indices lose ground overnight, leaving investors in no doubt – what is bad news for India is equally bad news for the region and for the global economy alike.\r\nMeanwhile, the middle part of this week’s session is likely to be dominated by announcements from central banks, with tomorrow’s Bank of England minutes providing the next risk event of note. This morning’s UK CPI inflation numbers for May, showed an unexpected contraction in the rate of British price rises. This is the first time UK inflation has shown a monthly drop since 1996, giving the Bank of England’s monetary policy committee the scope to expand its Quantitative Easing programme. \r\n\r\nThe Federal Reserve open market committee also convenes tomorrow, and market babble surrounding further ‘extraordinary measures’ is growing, following the disappointingly weak tone of recent US data, which has included a series of disappointing Non-Farm Payroll and Retail Sales numbers. The apparently euro-positive outcome to Greece’s weekend election has taken some of the heat out of the situation, however fears over the perilous state of the global economy persist thanks to rising yields on Spain and Italy’s national debts. These concerns could well prompt the FOMC to take action in order to pre-empt any downside for the US economy which a deterioration of the situation in Europe might trigger.\r\n\r\nIf the Fed does take steps to further loosen US monetary policy, then the Greenback is likely to be heavily sold, potentially pushing the GBP USD exchange rate back up to 1.6000 or above. Conversely, if the BoE minutes reveal that serious discussions were held by the nine-man committee regarding further QE in Britain, then the low-1.5000s may become a near-term target for Cable.

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