General market theme
Interesting price action in the currency markets over the first 24 hours of trading this week, even though several markets were closed for a holiday. The focus was mainly on the dollar, but it was the pound that stole investors’ attention yesterday with its significant rally to the upside ahead of today’s inflation levels’ release.
Dollar bulls were not convinced to further back the US currency after the impressive Retail Sales release on Friday, as the consensus is that just one bullish piece of data will do little to change the Fed’s cautious bias for the time being.
As we move further in the week there are plenty of important reports that we need to keep an eye out for. Today, apart from the UK inflation levels’ release that we mentioned above, there’s a couple of US-related events as well.
The release of the inflation report from the US is an important piece of news, and the Manufacturing and Industrial Production figures are also expected to play their role in the price action today.
Price action highlights
The euro corrected to the upside yesterday as dollar’s momentum died down, with investors hesitating to further back the US currency.
The euro rallied above the 1.1300 level to trade closely to the 1.1350 area. Further correction to the upside could be expected moving forward, especially if today’s US-related reports confirm Fed’s concerns for the domestic economy.
Should the single currency manage to print fresh highs today then we could see the rally extending towards the 1.1400 area while the dollar’s outlook remains in doubt.
The cable was the surprise yesterday, as not only did it manage to correct against the US dollar, but it staged an impressive rally against the US currency that caught many traders off guard.
The UK currency bounced off the 1.4300 lows to trade almost to 1.4500 yesterday as the combined effect of dollar’s outlook being under doubt and stronger inflation expectations from the pound today drove the currency significantly higher.
The question now is whether the cable can extend its rally after the release of the inflation figures, or whether this piece of news is now priced in.
Focus of the day
As we mentioned in our opening remarks, the UK and US inflation figures are the two most market-moving events of the day ahead, and later on the release of the production levels from the US is also expected to take its toll on the US currency.
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