Daily Financial Market Outlook

Daily Forex Fundamentals | Written by Lloyds TSB | May 19 09 06:55 GMT |

Overview & economic commentary We expect UK April inflation data this morning to show a fall in annual CPI to 2.7% from 2.9% in March, while annual RPI is set to decline further into negative territory to -0.8% from -0.4%. However, although the BoE last week warned of inflation undershooting the target in two years time (based in implied market interest rates), successive increases in core CPI inflation since December (to 1.7% in March) and tentative signs of a stabilisation in activity should allay fears of the UK economy facing a prolonged period of deflation. This is also backed up by the UK 5y5y forward break even inflation rate which has recently been fairly stable just below 4% (see chart). The debate currently attracting a lot of interest in the euro zone is the incoherent rhetoric coming out of the ECB with regard to the timing of a recovery and the likelihood of further policy measures to support the economy. With this in mind, participants will pay close scrutiny to this morning's release of the German ZEW survey of business expectations. The index turned positive in April for the first time since July 2007 and is forecast to have made further headway in May, perhaps supported by a rebound in new industry orders. However, the current conditions component of the ZEW has not yet reached a turning point and suggests that there could still be more bad news to come on the economy before conditions stabilise later this year. Housing starts and building permits data are due in the US and will be monitored for signs that construction activity is close to a bottom. The data disappointed last month, but news overnight of a slight increase in the NAHB home building confidence index in May to an 8-month high suggests that starts and permits could be in the process of stabilising. Currency commentary Follow through buying in Asian equities (the Indian Sensex is up 2%) was one of the driving forces behind the rise in $/Y overnight above 96.0. We suspect that disappointing Japanese Q1 gdp data later tonight could trigger a further leg upwards, especially if US stocks can extend to the upside. The S&P-500 closed above 900 yesterday and news that a number of US banks are applying to repay TARP funds may underpin financial stocks. £/ Y firmed above 148.0 but could run into some resistance depending on the outcome of UK CPI at 9.30. We forecast a decline to 2.7%. However, if recent trends are repeated, then we could see a slightly stronger number (watch core CPI) and this could give the pound fresh upside momentum. €/ £ slipped below 0.8820 and could struggle to resist a move towards the May 7 low of 0.8765, especially if ECB member Tumpel-Gugerell sows more confusion about ECB policy. US housing starts and building permits are due this afternoon and may impact dollar crosses. In EM, broad rupee strength squeezed $/rupee lower overnight to 47.2675 Major data and events today UK Consumer prices index (nsa) (09:30) Mar +0.2% Y-O-Y +2.9% Apr (f'cast) +0.6% Y-O-Y +2.7% Median +0.4% Range +0.1%:+0.6% UK Retail prices index (nsa) (09:30) Mar zero Y-O-Y -0.4% Apr (f'cast) +0.5% Y-O-Y -0.8% Median +0.3% Range -0.2%:+0.5% UK RPI ex-mortgage interest payments (nsa) (09:30) Mar +0.2% Y-O-Y +2.2% Apr (f'cast) +0.5% Y-O-Y +1.8% Median +0.4% Range +0.2%:+0.7% German ZEW survey (10:00) Mar +13.0 Apr (f'cast) +15.0 Median +20.0 Range +10.0:+33.0 US Housing starts (sa) (13:30) Mar 0.51mn Apr (f'cast) 0.52mn Median 0.52mn Range 0.46mn:0.55mn US Building permits (13:30) Mar 0.52mn Apr (f'cast) 0.53mn Median 0.53mn Range 0.48mn:0.56mn Japan Industrial output (05:30) (final) Mar (prel) +1.6% Y-O-Y -34.2% Mar (f'cast) +1.6% Y-O-Y -34.2% RBA publishes minutes from the monetary policy meeting (02:30) ECB member Tumpel-Gugerell speaks (10:30) US Fed member Stern speaks (18:15) Chart: Episode of negative UK RPI inflation is expected to be only temporary Lloyds TSB Bank http://www.lloydstsbfinancialmarkets.com Disclaimer: Any documentation, reports, correspondence or other material or information in whatever form be it electronic, textual or otherwise is based on sources believed to be reliable, however neither the Bank nor its directors, officers or employees warrant accuracy, completeness or otherwise, or accept responsibility for any error, omission or other inaccuracy, or for any consequences arising from any reliance upon such information. 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