Expert Analysis of Today's Market

• The dollar fell against most key currencies on Tuesday after US core CPI rose less than expected in March. The EUR/USD is testing support at the 1.36 handle. The yen recovered from a record low against the euro and the lowest against the dollar in almost seven weeks on profit-taking. We sold the EUR/USD and bought the USD/CAD as the dollar was oversold.


• The GBP/USD broke important resistance and hit a new high above 2.00 today, after UK inflation unexpectedly accelerated to the fastest pace in a decade, sending the pound to $2 for the first time since September 1992 on speculation the Bank of England will keep raising interest rates. The pair is overbought and we may see some profit-taking. The trend is still up.

Financial and Economic News and Comments

US & Canada

• The US consumer price index rose 0.6% m/m and 2.8% y/y in March, the US Labor Department said. The core CPI, which excludes volatile food and energy prices, advanced just 0.1% and 2.5% y/y. The core inflation data were better than expected; however, remaining above the Federal Reserve’s perceived comfort zone. So do not expect any interest-rate cut anytime soon.

• US housing starts increased 0.8% m/m in March to a seasonally adjusted 1.518 million annual rate, after rising 7.6% in February, the US Commerce Department said. February starts were originally reported increasing by 9.0% to 1.525 million. From last year there is still a large decline as housing starts fell 23% y/y. Building permits rose a stronger-than-expected 0.8% m/m in March to a 1.544 million annual rate.


• US industrial production declined a more-than-expected 0.2% m/m in March following a 0.8% increase in February, the Federal Reserve said. Capacity utilization fell to 81.4%. February capacity use was 81.6%, revised down from 82.0%.


• Inflation remains too high for the Fed’s comfort, Philadelphia Federal Reserve Bank President Charles Plosser said in a speech at Rutgers University School of Business.

Europe

• The ZEW German investor confidence index rose to a stronger-than-expected 16.5 in April, the highest level since June, from 5.8 in March, the ZEW Center for European Economic Research reported. The current situation gauge rose to a record 76.9 in April from 69.2 in March. The economic expectations indicator rose by 5.6 points to 10.7. The ZEW data suggests the German economy is likely to grow faster in the next six months.


• UK inflation in March unexpectedly jumped 0.5% m/m and 3.1% y/y, the fastest pace in a decade, from February’s rate of 2.8% y/y, the Office for National Statistics said.


• The inflation rate is now more than a percentage point above the Bank of England’s 2% target. Governor Mervyn King wrote a letter of explanation for the first time since the BOE was granted independence in 1997. In that letter, King said policy makers must ensure that UK inflation expectations are well anchored on the BOE’s target rate of 2%.

Asia-Pacific

• Bank of Japan Governor Toshihiko Fukui told parliament that monetary conditions in Japan remain accommodative. “Japan has emerged from a decade of difficult times and we are still in the midst of adjusting interest rates to a level that is truly desirable….The BOJ is in the process of raising rates gradually, albeit very cautiously,” Fukui said, adding that the BOJ will guide monetary policy appropriately by closely examining economic and price conditions.

FX Strategy Update