Good morning,

Inflation and the lack thereof

This week is all about inflation data and today’s UK number, while it is unlikely to have too much of a bearing on interest rate expectations in the short term will be able to give us a handle as to what is likely to bring inflation through soon enough.

CPI is set to rise at about 0.4% in March on the year with the ‘core’ CPI number that discounts away volatile fuel and energy prices rising by about 1.4%. With that in mind, from a macroeconomic point of view, I think that we would be sat hear talking about an imminent interest rate rise from the Bank of England were the referendum not hanging over us like a Farage shaped sword of Damocles.

Reasons for optimism

The labour market remains tight, consumer confidence is also high and inflation pressures are starting to build courtesy of a pick up in oil prices in the past months and increased air fares over the Easter holiday period. While we may not have seen the lower value of sterling increase inflation pressures quite yet, it will have an effect in the coming months and through the early part of next year.

Thoughts on inflation as part of the Bank of England’s policy meeting this week are likely to be actually more important than today’s number as should receive a decent reading of the Monetary Policy Committee’s thoughts on how the dip in sterling could translate through to prices, alongside further thoughts on the UK referendum’s effects on near-term price pressures.

The UK inflation numbers are due at 09.30.

Despite a little rally yesterday the pound’s position is thus; Sterling is still dramatically undervalued on a trade-weighted basis – by as much as 10% – alongside net positioning which remains extremely bearish and movements in options markets that suggest that protection against sterling downside is a lot more expensive than it was in the lead-in to the Scottish referendum. There are the opportunities for a real and substantive rebound soon but we must get the vote out of the way first one feels.

Yen stumbles finally

Elsewhere, the yen has snapped its run of gains following a week or so of beating up on all and sundry. Finance Minister Aso has continued the run of Japanese politicians and officials commenting that action would be taken as needed if such “one-sided moves” continues. Thursday’s US inflation number may allow for a run higher in the US dollar which could take some of the pressure off Japanese officials in the short term and as long as the pace of the yen appreciation slows.

Commodity currencies have managed to hold on to their gains against the US dollar overnight given continued expectations that Sunday’s OPEC meeting in Doha leads into the market finding a bottom in oil prices.

Have a great day.

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