FxPro Forex Analysis: Sterling on the up

As markets await the Fed decision and statement tomorrow evening, the main distraction for today will be the release of CPI data in the UK. The April numbers showed the headline rate falling into negative territory. Whilst in some respects this does follow a trend seen in several other European countries, the prices declines in the UK have proven to be concentrated in a narrow band of sectors. A fair proportion of the fall in the headline rate last month was driven by air fares, which prove to be particularly volatile around the Easter period and are likely to push the headline rate in the opposite direction when the data is released at 08:30 GMT. The market looks for an increase to 0.1% for YoY CPI, with risks if anything to the upside. Core inflation (removing mainly energy and food prices) should also increase back to 1.0% YoY (from 0.8% last month). This could give sterling some further support in the near-term, cable seeing net resistance at the 1.5690 level.

On the other big issue of the week – Greece – the noises coming from both sides are not positive, with neither working on new measures or compromises ahead of Thursday’s meeting of Eurozone finance ministers. This does not bode well for any sort of agreement this week. The single currency managed to recover the initial opening gap lower yesterday, but it’s clear that other markets, such as equities and bonds, are nervous regarding the situation. The prospect of a Greek default is rising fast and even if they scrabble together enough cash to meet the end of month payments to the IMF, bond redemptions in July will be another matter entirely. Expect volatility to remain high for the coming days. Note that German ZEW data is released at 09:00 GMT and US housing starts at 12:30 GMT.