DailyFX
British Pound Top Volatility Risk on February CPI Release
John Kicklighter

Talking points:

• Dollar Retreats as Bulls Look for New Driver

• British Pound Top Volatility Risk on February CPI Release

• Australian Dollar Advances Despite Risk Slump, Weak Chinese Data

Dollar Retreats as Bulls Look for New Driver

It doesn’t seem like a more timely interest rate outlook for the US is going to be able to carry the dollar to new highs all by itself. Though the market is still processing the FOMC rate decision last week – complete with Taper, robust forecasts and a forward shifting rate forecast – the currency itself was back on the defensive to start this week. Though the 0.2 percent slip from the Dow Jones FXCM Dollar Index (ticker = USDollar) was mild, the breadth of the weakness was remarkable. The benchmark dollar dropped against all of its major counterparts. Though rate forecasts carry substantial weight for the FX market at this stage of the global yield cycle, the timeline is still too vague and differentiation from its major counterparts (ECB, BoE, etc) too subtle to charge lasting trends. We need something more.

The opening session’s economic headlines offered a mixed picture of the ‘first half Fed rate hike’ discussion. For data, the Chicago Fed’s February National Activity Index returned to positive territory as 54 of the 85 monthly components improved. Meanwhile, Markit’s manufacturing activity index for the current month cooled more than expected from the previous month, but was still soundly in growth territory with its second best showing in 15 months. Two year Treasury yields – a good maturity to gauge rate expectations over the time frame we looking at – rose to a six-month high. Ahead, we have the Conference Board’s consumer confidence survey, new home sales and two Fed speakers (Lockhart and Plosser who will both speak on the economy).

Yet, active calendar aside, the greenback’s best hope for sustained volatility and trend rests with more elemental considerations. We have not seen a genuine risk aversion wave hit the market in months and speculative appetites are building a tolerance to theatrical headlines. The Ukrainestandoff, a definitive global shift away from uncapped stimulus and cooler developed world growth readings are being met with a shrug.

British Pound Top Volatility Risk on February CPI Release

This is a dangerous position for the sterling to find itself in before significant event risk. Where GBPUSD has already slipped the floor of its advancing trend from this past summer, GBPJPY stands at the very cusp of turning its 18-month bull trend and GBPAUD risks full collapse on a near-5000 pip bull trend. The calendar item in question is the February consumer inflation (CPI) report due to cross the wires at 9:30 GMT. In this indicator, we find the true measure as to whether rate hikes are needed or not. Where unemployment can drive the Bank of England to loosen policy, an improvement does not necessarily require the group to rein it in. That comes with a rise in price pressures.

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