Major Currency Pairs Analysis: April 18, 2012

European consumer prices increased at a faster pace than initially estimated in March, driven by energy costs, complicating the European Central Bank’s task as it tries to push the inflation rate below its 2 percent limit. Inflation in the 17-nation euro region held at 2.7 percent for a fourth month, the European Union’s statistics office in Luxembourg said. That’s higher than the estimate of 2.6 percent published on March 30.

The economy may struggle to gather strength as budget cuts and rising energy prices erode consumer spending and company investment. European Central Bank President Mario Draghi on April 4 quashed talk of an early exit from emergency stimulus measures as Spain struggled to borrow in financial markets. Policy makers left the benchmark rate at a record low 1 percent. The euro extended gains after the data was released, trading at $1.3166 in Brussels, up 0.2 percent.

Euro-region inflation may average about 2.4 percent this year and 1.6 percent in 2013, the ECB said on March 8. The Frankfurt-based central bank aims to keep annual gains in consumer prices just below 2 percent. The euro-region’s core inflation rate, excluding volatile costs such as energy, rose to 1.6 percent from 1.5 percent in February, the statistics office said. In the month, consumer prices gained 1.3 percent.
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GBP/USD

U.K. inflation increased for the first time in six months in March driven by higher food and clothing prices, denting hopes of another round of quantitative easing. Annual inflation rose unexpectedly to 3.5 percent from 3.4 percent in February, the Office for National Statistics revealed. Economists had expected the annual rate to hold steady at 3.4 percent. Inflation continues to hover above the Bank of England's 2 percent target.

Meanwhile, consumer prices logged a slower monthly increase of 0.3 percent after a 0.6 percent gain in February. The increase matched economists' expectations. Excluding energy, food and alcoholic beverages, core annual inflation rose to 2.5 percent in March from 2.4 percent in February. The rate was forecast to fall to 2.3 percent.

The largest upward pressures to the change in consumer price annual inflation between February and March came from food, clothing, and recreation and culture. There is a real danger of inflation proving to be sticky over the coming few months as high oil prices impact. If consumer price inflation does prove to be sticky over the coming months, this will have.
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USD/JPY

In early European deals the Japanese yen erased its Asian session gains and declined further against other major currencies despite renewed worries about Europe's debt crisis. The Japanese yen is considered a safe haven currency as Japan has lower lending rates. The currency  tends to gain in times of financial turmoil and vice-versa.

Spanish 10-year government bond yields rose above 6 percent for the first time this year following news that the ECB lending to the country's financial institutions almost doubled since February. The yen also pared its gains, hitting 4-day lows of 106.32 against the euro, 128.84 against the pound and 88.46 against the franc, compared to highs of 105.34, 127.61 and 87.63, respectively. The next downside target level for the yen is seen at 88.8 against the franc, 107.0 against the euro and 129.5 against the pound. Against the US dollar, the yen is trading around 80.76 with 81.0 seen as the next downside target level.
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USD/CAD

The Bank of Canada kept its main interest rate unchanged at 1 percent for a 13th time while saying higher borrowing costs “may become appropriate” because economic growth and inflation will be faster than it forecast. The central bank’s announcement said the economy will reach full output in the first half of next year, sooner than a January forecast for the third quarter of 2013, while predicting that Europe will emerge from recession later this year and that the U.S. recovery will be stronger than policy makers expected.

The Canadian dollar extended gains after the decision, rising 0.9 percent to 99.07 Canadian cents per U.S. dollar in Toronto.Two-year government bond yields jumped nine basis points to 1.32 percent, the highest since August. The bank raised its growth estimate for this year to 2.4 percent from 2 percent, and lowered the 2013 forecast to 2.4 percent from 2.8 percent. It also gave its first prediction for 2014 growth, at 2.2 percent.
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