GBP/USD Awaits Inflation As Greece-Europe Talks Stall

The Bank of England (BoE) has warned that inflation could turn negative in the Spring ahead of the consumer price inflation (CPI) release. United Kingdom inflation has declined after the drop in the price of oil and food. The CPI readings have missed expectations in the last two months and has only managed to beat expectations three times in the last twelve months. The governor of the BoE Mark Carney has stated that this is a transitory fall and inflation will rise at the end of year to avoid deflation.

The GBP/USD continues to appreciate in 2015 after the U.S. economy continues to add disappointing economic indicator releases. The USD was able to have a rally at the end of 2014 and look to threaten the 1.50 price level but has not been close to that since the end of January.

Governor Carney has already warned the market that CPI will be low in the first half of 2015 with the publication of the Bank of England’s Quarterly Inflation report, so the expectations are for a print slightly below or matching the forecast of 0.3 percent. Low inflation has not affected the optimistic forecasts for U.K. growth this year as the central bank has upgraded its 2015 and 2016 expectations to 2.6 percent.

German and European ZEW

While the Greece and the European Union negotiations have struggled to reach an agreement the European Commission upgraded forecasts have begun to be validated with strong German manufacturing and GDP rise. Europe’s growth engine seems to have worked through the headwinds from last year and is talking full advantage of lower energy prices.

Last month the German ZEW reading was at a 11 month high before the imminent arrival of the European Central Bank’s quantitative easing program aimed at avoiding deflation. The ZEW survey asks participants to rate the six month economic outlook of the German and European economies and its clear that in the post ECB QE world German analysts and institutional investors have reason to be more confident about the state of German and European economies.

Central bank monetary policy and Greek debt negotiations have driven the price of the euro. The ECB has laid all its monetary policy cards on the table and its up to the market to make the next move. The two sides of the Greek debt negotiation continue to be far apart as the newly elected government is seeking to renegotiate the terms of the bailout with no luck with a fast approaching deadline at the end of the month.

Austerity has been a bitter pill to swallow for the Greek people who voted Syriza into power, but even now the majority of the nation does not want to exit the Euro zone which means they would not see it as a sign of weakness to seek to accommodate the Union’s requests of honouring the original agreement.

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza