Daily Financial Market Outlook

Daily Forex Fundamentals | Written by Lloyds TSB | Sep 11 08 07:10 GMT |

Overview & economic commentary

The morning session is focused on the UK, with the Bank of England releasing its quarterly inflation attitudes survey and MPC members, including Governor Mervyn King, testifying to the Treasury Select Committee. Inflation expectations have risen significantly in recent quarters in tandem with the unexpectedly sharp rise in actual inflation, as the chart below shows. The last inflation attitudes survey was taken when CPI inflation was 'just' 3% and RPI was 4.2% (in April). With CPI now at 4.4% and RPI at 5% in July, we could see a further rise in inflation expectations. If so, this will make uncomfortably reading for the majority on the MPC and may prevent a further rate cut this year, despite the fact that the economy stagnated in Q2. Although markets have now priced in a quarter-point rate cut by the year-end, we believe MPC members testifying today may give a more balanced (or neutral) view regarding interest rate prospects, given that CPI is set to surge through 5% in the next month or two (August CPI figures are due next week). Elsewhere, there are several scheduled speeches by ECB members, including Trichet this evening, while the ECB publishes its monthly bulletin this morning, which is expected to reiterate the Bank's neutral policy stance. In the US, trade data are due and are expected to show a widening deficit to around $58bn in July from $56.8bn in June. Import prices and initial jobless claims are also due. The RBNZ cut interest rates overnight by a larger than expected 0.50% to 7.50%.

Currency commentary

A broad based decline in the euro o/n squeezed €/$ below 1.40 and helped €/£ to extend below 0.80. Led by oil, there was no obvious other catalyst for the move and with euro zone yields holding up better compared to the US, some blame has to be put on the bearish backdrop for the euro zone economy. E European fx markets found a decent bid yesterday after Poland committed itself to euro membership by 2011. This puts the convergence trade back on and should help crosses like euro/zloty to retrace some of the heavy losses posted earlier this month in the wake of the Russia/Georgia conflict. Speaking of which, the rouble remains under tremendous pressure as overseas investors pull out funds. $/rouble cruised above 25.50 o/n and may line up a test of 26.0 if US economic data does not disappoint this afternoon. £/rouble is flat around 45.1850. The surprises 50bps rate cut by the RBNZ triggered a liquidation of nz$ positions o/n, pushing $/NZ$ below 0.65. £/NZ$ cleared 2.6950 and looks set for a test of 2.70.

Major data and events today

* US Trade balance (sa) (13:30)
Jun -$56.8bn
Jul (f'cast) -$58.0bn
Median -$58.0bn Range-$63.0bn:-$54.6bn
* US Import prices (13:30)
Jul +1.7% Y-O-Y +21.6%
Aug (f'cast) -1.0% Y-O-Y +20.8%
Median -1.5% Range -3.3%:+0.5%
* US Initial claims (w/e 6/9) (13:30)
Previous 444K
Forecast 420K
Median 438K Range 400K:460K
* US Treasury statement (sa) (19:00) (Aug)
Jul -$117.0bn
Median -$104.0bn Range -$168bn:-$70bn
* Japan Machinery orders (00:50)
Jun -2.6%
Jul (f'cast) -4.0%
Median -4.0% Range -10.2%:+1.2%
* Australia unemployment rate (02:30)
Jul 4.3%
Aug (f'cast) 4.4%
Median 4.4% Range 4.3%:4.5%
* Canada new housing index (13:30)
Jun +0.1%
Jul (f'cast) zero
Median +0.1% Range zero:+0.1%
* ECB member Mersch speaks in Luxembourg (08:00)
* ECB member Papademos speaks in Hamburg (08:15)
* ECB publishes its monthly report (09:00)
* Bank of England to release its Quarterly Inflation attitudes survey (09:30)
* Bank of England MPC members testify to the Treasury Committee on the August 2008 Inflation Report (09:30)
* ECB members attend the EUROFI financial conference in Nice, France (till 12th), speakers include Tumpel-Gugerell (13:30) and President Trichet (19:00)
* Fed member Kohn speaks on financial regulation in Washington DC (19:45)
* US Treasury to auction 10yr notes (18:00)

Chart: UK inflation expectations have risen sharply this year, in tandem with unexpectedly large increases in actual inflation. Will inflation expectations climb again?

Lloyds TSB Bank
http://www.lloydstsbfinancialmarkets.com

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