Key Points
USD remains weak as developments in high-yielders leave it in the shade.
Further cable strength looks likely initially.
UK MPC minutes and average earnings feature today.

Market Outlook
High yielders have certainly come back with a vengeance in recent weeks and this has more to do with positive developments in high-yielding countries rather than any deterioration in views about prospects in Japan. The dramatic developments seen this week in the UK (core PPI output and CPI well ahead of expectations) follow hawkish developments in both the AUD and the NZD over the past few weeks. The USD itself is no low-yielder, but has been unable to take part in this latest development because of continuing questions being raised about the status of the US economy. With such doubts still in place and rate hike expectations extending further in other high-yielders, there is clearly a window of opportunity for more broad-based USD weakness in the short-term. A run of stronger US data, particularly on the ISMs, is required to change these circumstances in the next few months.

The UK MPC finds itself in a difficult situation. Primarily, they will be concerned about maintaining their overall credibility with regard to fighting inflation and will also be mindful of the fact that while recent CPI strength is likely to be transient (core CPI for example is only 1.9%) there is some evidence of an accumulation in core inflation pressure. Such examples range from the recent rise in core PPI output prices, survey evidence about rising inflation expectations amongst manufacturers and the fact that while core CPI is not that high at 1.9%, it has risen steadily from 1.1% in Q3 last year. A May hike is a done deal, but it is not clear that a further move beyond that will be required. However, until there is evidence of some weakness in PPI and/or signs that previous rate hikes are starting to have an impact on consumer spending, the market will continue to see upside risk on UK interest rates.

This should equate to further upside risk on cable in the very short-term, although conditions are likely to remain extremely volatile over the next week or so. The immediate barrier to any further upside is the high from September 1992, which depending on the database you look at ranges from 2.0100 through to 2.0130. On the plus side for GBP is the ongoing relative interest rate developments mentioned above, as well as the fact that the short-term market is probably not as long of cable as it was in January. This should mean further upside momentum initially, but the situation could reverse somewhat if such momentum does start to fade. UK MPC minutes and average earnings are due today (see below for preview). On EUR-USD, the key level remains at 1.3666 (Dec 2004 high) and this looks like being tested in the short-term.

Day Ahead
UK - this morning's minutes from the April MPC meeting have probably been made redundant by the data seen so far this week. Even a repeat call for a rate cut from Blanchflower will do little to dampen the recent upturn in rate hike expectations and there is also an outside chance that one or both of Sentance and Besley vote for a hike. The same argument may also apply with today's average earnings data. This has been subdued in recent months despite fears about a pick-up in pay settlements, but core PPI output has gone up anyway, suggesting that pricing power (for whatever reason) is alive and well. This will be the overriding concern for the MPC and to this extent even a weaker than expected earnings number today may fail to disturb rate hike expectations that much. A strong number would further reinforce the need for tighter policy.

Diary
Data/event BST Consensus*
 
SE Riksbank's Oberg on mon policy 08.30
GB Claimant count (Mar) 09.30 -5k
GB ILO unemp 3m ave (Feb) m/m 09.30 -3k last
GB LFS employm't 3m ave (Feb) m/m 09.30 18k last
GB Average earnings (Feb) 3m y/y 09.30 4.2%
GB Earnings ex-bonuses (Feb) 3m y/y 09.30 3.6%
GB MPC minutes (Apr 4-5 meeting) 09.30
US Mortgage apps - purchases w/w 12.00 2.7% last
CA Net portfolio balance (Feb) 13.30 -C$11.5bn
EU ECB's Trichet speaks 15.00
JP Tertiary index (Feb) m/m 00.50 -0.4%
CN GDP (Q1) y/y 03.00 10.4%
CN CPI (Mar) y/y 03.00 2.8%
Latest data Actual Consensus*
US ABC consumer conf (w/e Apr 15) -5 -7 last
NZ CPI (Q1) q/q 0.5% 0.6%
NZ CPI (Q1) y/y 2.5% 2.6%
AU Consumer sentiment (Apr) m/m -0.2% 3.7% last
* Consensus unless stated