UK CPI Sends Sterling Higher, Other Majors Little Changed

The US dollar is little changed against most of the major currencies, remaining near the recent trough and in the post-intervention environment, where implied volatility has been sharply reduced. Sterling is the main exception and as a higher than expected inflation figure encouraged rate hike expected to be brought forward.

UK Feb CPI rose 0.7% to 4.4% year-over-year.  The consensus had been for 4.2% rate after Jan's 4.0%.  Unlike in the euro zone and the US, it cannot be simply dismissed as commodity prices.  The UK's core rate is 3.4%, while 3.1% was expected after Jan's 3.0%.   However, the rub here is that if one were to exclude administered price hikes, like VAT, tuition and the like, the UK core rate is considerably lower according to industry estimates.

In any event, sterling is trading at multi-month highs, reaching almost $1.64.  Last year's high was near $1.6460, though the extent of dollar negativity is reflected in some talk of a move toward $1.70. 

Meanwhile, the the one-day coordinated intervention operation has done the trick. My point has been that intervention was aimed not at a spot level as much as squashing the volitility that was destabilizing other markets.  The 3-month implied volatility spiked to 17.5% last Thursday and now it is just below 11.7%.  It was at 11.55% at the end of last year.    Remember in early March it had been at multi-year lows near 9.3%.  Today the dollar is trading inside yesterday's ranges and straddled the JPY81 level. 

Euro continues to climb in a fairly orderly fashion, holding above the $1.4200 level.  The high from is near $1.4280 and thast is within striking distance today.  The $1.4500 area is the next obvious target.    The only thing of note that I see is that in the options market the market still pays a premium for euro puts over euro calls and that premium has generaly trended higher since around March 8, even as the euro climbs higher.   The scenario worth considering is a "buy the rumor sell the fact" on the April 7th ECB rate hike. 

Meanwhile, despite good reception to Spanish auction, peripheral tension runs high.  Ireland could very well need another aid package.  Greece restructuring remains a question of time, i.e, European officials appear to want to hold off until ESM in a little more than 2 years.  Portugal still looks like it needs assistance. 

Talk about collective action clauses and debt brakes seem to be surreal as such clauses largely exist and the Stability and Growth pact does as well.  Repeating these elements will not make them any more effective.