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Pound rises after inflation data rises back above zero

GBP

The pound advanced on Tuesday after data showed inflation in May rising by 0.1% after it had fallen by – 0.1% in April – the first time the U.K economy had experienced deflation since the 1960s. The sector which showed the largest rise in prices was transport, perhaps as a result of people rushing to book their summer getaways, and early booking discounts dwindling as summer approaches.

The rebound in May was a vindication for BOE governor Carney who had dismissed as a transitory blip the -0.1% dip in April, stressing it was almost wholly due to the effects of oil prices falling below 60 dollars.

Core Inflation , which strips out food and energy, rose by a higher 0.9% – but not as much as the 1.0% expected; previously it had been 0.8%.

The pound also rose as a result of an increase in safety flows from investors fleeing the euro, but also on positive expectations for the release of the BOE minutes on Wednesday morning, which market participants think could carry a more hawkish tone.

USD

The dollar rose on Tuesday after housing data remained in robust recovery mode.

Building Permits rose by a higher-than-expected 11.8% mom in May, compared to the 9.8% in April, and much higher than the -3.5% expected. It represented an 8-year high for the metric and continued to support the view that housing and house prices were rebounding strongly.

Housing Starts, meanwhile, were not as strong, falling by -11.1% – although this was from a very high previous month’s gain of 22.1%, and seen in the light of the previous month’s gains the fall was not as dramatic as the figures appeared to show, although the result was lower than the -4.0% forecast.

Nevertheless the take-away from the data was that it continued to paint a rosy picture of recovery, possibly even supporting the FOMC’s decision as to when to tighten policy. Speculation remains that the Fed might even announce a rise in rates tomorrow, as many areas of the economy, including housing, which it had previously been concerned about, had improved considerably in the last few months.

As chief economist Chris Rupkey of MUFG in New York said: “Housing has been the laggard in this recovery and the moon shot surge in new permits today means the final piece of the recovery puzzle is finally falling into place.”

EUR

The euro weakened on Tuesday after a fall in sentiment data from the ZEW institute and a lack of progress in Greek cash-for-reform negotiations weighed.

The Economic Sentiment component of the German ZEW survey dropped to 31.5 from 41.9 in June when a fall to 37.3 had been expected. For the Euro-zone the same survey pulled-back to 53.7 from 61.2.

The Current Situation component of the German ZEW survey, meanwhile, showed a fall to 62.9 from 65.7 in June, when it had been expected to fall less steeply to 63.0.

According the ZEW chief economist, Professor Clemens Fuest, the factors restraining sentiment included: “external factors…including, in particular, the ongoing uncertainty over Greece’s future and the restrained dynamic of the global economy.”

Grexit fears increased after defiant comments and increasing intransigence from leading Greek politicians risked alienating the country and jeopardising cash-for-reform negotiations. Prime Minister Alexis Tsipras was reported as complaining to his parliament that creditor institutions were now trying to “humiliate” Greece with more cuts.

Markets have little faith in Thursday’s key Euro-group meeting leading to a breakthrough after Greek Finmin Varoufakis said he is not bringing any new proposals to the table. Whether or not it was intended, this was a rebuttal of ECB President Mario Draghi’s comments yesterday (Monday) that the “ball is in Greece’s court.”

JPY

There has been little movement within a tight range for the USD/JPY pair on Tuesday, trading at 123.38 yen per dollar late in the New York session.

The Japanese government is keeping its basic opinion of the economy unchanged for June but upgraded its view on capital spending as companies moved to increase investment. ” the Japanese economy is on a moderate recovery” the cabinet office repeated in its latest monthly economic report, rehashing its view since March.

Business investment however was described as ” picking up recently” after the Finance Ministry said capital spending expanded 5.8% in the January-March quarter, the report said. Last month business investment was described as ” flat”.

BOJ Governor Kuroda said today in the Diet that in his remarks last week that he did not mean to evaluate the current nominal exchange rate or forecast the outlook, his intention was to give a theoretical explanation in response to a question about effective rates. ” I did not say that I’m seeking a weak yen in nominal terms, nor did I say that it is unlikely that the yen will fall further” he added.

GBP

The pound advanced on Tuesday after data showed inflation in May rising by 0.1% after it had fallen by – 0.1% in April – the first time the U.K economy had experienced deflation since the 1960s. The sector which showed the largest rise in prices was transport, perhaps as a result of people rushing to book their summer getaways, and early booking discounts dwindling as summer approaches.

The rebound in May was a vindication for BOE governor Carney who had dismissed as a transitory blip the -0.1% dip in April, stressing it was almost wholly due to the effects of oil prices falling below 60 dollars.

Core Inflation , which strips out food and energy, rose by a higher 0.9% – but not as much as the 1.0% expected; previously it had been 0.8%.

The pound also rose as a result of an increase in safety flows from investors fleeing the euro, but also on positive expectations for the release of the BOE minutes on Wednesday morning, which market participants think could carry a more hawkish tone.

USD

The dollar rose on Tuesday after housing data remained in robust recovery mode.

Building Permits rose by a higher-than-expected 11.8% mom in May, compared to the 9.8% in April, and much higher than the -3.5% expected. It represented an 8-year high for the metric and continued to support the view that housing and house prices were rebounding strongly.

Housing Starts, meanwhile, were not as strong, falling by -11.1% – although this was from a very high previous month’s gain of 22.1%, and seen in the light of the previous month’s gains the fall was not as dramatic as the figures appeared to show, although the result was lower than the -4.0% forecast.

Nevertheless the take-away from the data was that it continued to paint a rosy picture of recovery, possibly even supporting the FOMC’s decision as to when to tighten policy. Speculation remains that the Fed might even announce a rise in rates tomorrow, as many areas of the economy, including housing, which it had previously been concerned about, had improved considerably in the last few months.

As chief economist Chris Rupkey of MUFG in New York said: “Housing has been the laggard in this recovery and the moon shot surge in new permits today means the final piece of the recovery puzzle is finally falling into place.”

EUR

The euro weakened on Tuesday after a fall in sentiment data from the ZEW institute and a lack of progress in Greek cash-for-reform negotiations weighed.

The Economic Sentiment component of the German ZEW survey dropped to 31.5 from 41.9 in June when a fall to 37.3 had been expected. For the Euro-zone the same survey pulled-back to 53.7 from 61.2.

The Current Situation component of the German ZEW survey, meanwhile, showed a fall to 62.9 from 65.7 in June, when it had been expected to fall less steeply to 63.0.

According the ZEW chief economist, Professor Clemens Fuest, the factors restraining sentiment included: “external factors…including, in particular, the ongoing uncertainty over Greece’s future and the restrained dynamic of the global economy.”

Grexit fears increased after defiant comments and increasing intransigence from leading Greek politicians risked alienating the country and jeopardising cash-for-reform negotiations. Prime Minister Alexis Tsipras was reported as complaining to his parliament that creditor institutions were now trying to “humiliate” Greece with more cuts.

Markets have little faith in Thursday’s key Euro-group meeting leading to a breakthrough after Greek Finmin Varoufakis said he is not bringing any new proposals to the table. Whether or not it was intended, this was a rebuttal of ECB President Mario Draghi’s comments yesterday (Monday) that the “ball is in Greece’s court.”

JPY

There has been little movement within a tight range for the USD/JPY pair on Tuesday, trading at 123.38 yen per dollar late in the New York session.

The Japanese government is keeping its basic opinion of the economy unchanged for June but upgraded its view on capital spending as companies moved to increase investment. ” the Japanese economy is on a moderate recovery” the cabinet office repeated in its latest monthly economic report, rehashing its view since March.

Business investment however was described as ” picking up recently” after the Finance Ministry said capital spending expanded 5.8% in the January-March quarter, the report said. Last month business investment was described as ” flat”.

BOJ Governor Kuroda said today in the Diet that in his remarks last week that he did not mean to evaluate the current nominal exchange rate or forecast the outlook, his intention was to give a theoretical explanation in response to a question about effective rates. ” I did not say that I’m seeking a weak yen in nominal terms, nor did I say that it is unlikely that the yen will fall further” he added.



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