We’re already seeing sterling coming under pressure this morning ahead of today’s CPI figure which is due to come in at 1.6% Year-on-Year, a decline from last month’s 1.7% and in line with the Bank of England’s forecast. We should see the Month-on-Month number decline from 0.5% to 0.2% with transportation prices likely to be the biggest contributor to the decline once again. When you look at petrol prices a year ago, they were over 10p a litre higher than they are today, every month so far this year has seen roughly 1p shaved off the average and luckily for drivers the Chancellor has avoided hiking fuel duty. This means there’s a chance we could see CPI come in lower than the 1.6% that’s expected and the weakness in GBPUSD looks like traders positioning themselves for such an outcome. GBPUSD has hit a low of 1.6686 this morning and is trading just above there at the time of writing so a weaker CPI could see an extended move lower, but anything around expectations could lead to an unwinding of that weakness.
Later today Janet Yellen will be speaking in New York giving her latest thoughts on the world’s biggest economy and the Fed’s approach to monetary policy. Her communication of policy has been somewhat mixed so far and certainly requires honing after the knee-jerk reaction from markets when she said rate hikes will come 6 months after tapering ends. Regardless, the threat of increased volatility in FX markets this afternoon is high, as investors continue to wonder when the consensus view of dollar strength will materialise.