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16 Jul 2013
Flash: GBP likely to be driven by domestic data – BMO Capital Markets
FXstreet.com (New York) - The very small downside miss in UK June inflation reported earlier today probably didn’t warrant even a knee-jerk reaction in the GBP on the basis of fundamentals alone, but we suspect market participants continue to adjust their overall GBP exposures in front of the July minutes due for release tomorrow, which admittedly could cause some volatility, notes Stephen Gallo at BMO Capital Markets.
In our opinion, “the GBP really should not be a sell (buy) on lower (higher) inflation readings, since falling inflation, amongst other things, supports real income growth and should therefore be a benefit to a small, open economy like the UK’s. Realistically though, it’s perhaps close to impossible to force FX participants to change the nature of the way they trade economic data for a major, highly developed economy.” Gallo adds. Our base-case scenario then is that further above-target CPI strength in the UK will more likely affect the medium-term value of the GBP, just as a weaker external position and relatively fast inflation rates have forced the GBP to remain surprisingly weak in 2013.
In our opinion, “the GBP really should not be a sell (buy) on lower (higher) inflation readings, since falling inflation, amongst other things, supports real income growth and should therefore be a benefit to a small, open economy like the UK’s. Realistically though, it’s perhaps close to impossible to force FX participants to change the nature of the way they trade economic data for a major, highly developed economy.” Gallo adds. Our base-case scenario then is that further above-target CPI strength in the UK will more likely affect the medium-term value of the GBP, just as a weaker external position and relatively fast inflation rates have forced the GBP to remain surprisingly weak in 2013.