When Inflation doesn't Work!

The cost of living in Euro-zone and UK rose in June but the market reaction looks completely different to what you may remember from July. At that time, rising inflation headlines in addition to revived concerns on the health of the U.S. financial institutions, Freddie Mac and Fannie Mea specifically, helped both Euro and pound reaching their records highs against the dollar. However inflation my look not so frightening when everything pointing to the possibility of a sharp slowdown in global economic activity:

• IMF's World Economic Outlook Update in July pointed to an increasingly slowing economy in the UK, EU, and Japan.
• Gross Domestic Product shrunk in Euro-area in the second quarter, for the first time since introducing the Euro, after economy contracted in Germany and France, the two largest euro economies.
• Japan GDP also showed that the world second largest economy contracted at an annualized 2.4 percent in the second quarter when Japanese officials earlier warned about it.
• The data also showed negative numbers for Industrial Production in Japan, France, and Euro-area.
• Moreover, the war in Georgia just increased concerns about the security issues in European economies.

There were certainly reactions to this situation. Commodity prices lead by oil extended their declines. One month ago it was really difficult to imagine gold at 772 $/ounce but it happened on Aug 15.

The only winner was certainly the dollar which appreciated against all major currencies. The depreciation of sterling was the most in almost 37 years. Nevertheless, I think the appreciation of the greenback against the Yen was somewhat limited which may come from a widely reduction in carry-trading.

Finally, almost all economic data for the week were overshadowed, positively or negatively, by the big-picture which was the fear of a global economic slowdown. There was almost no significant reaction to the GDP or CPI in Euro-zone at the time of the releases showing that most of decisions had been already made.

Moving Forward with Profit

German wholesale price index rose more that estimates, French industrial production unexpectedly slowed in June when Italian CPI rose nearly in line with expectation. In the UK, Trade deficit widened more than analysts estimates while Producer Price Index Output rose 10.2 percent from a year earlier suggesting inflationary pressures has still way to be moderated.

There is no significant economic data from the U.S. today, but Housing Starts in Canada could affect dollar. I decided to hold my positions, both EURUSD and GBPUSD which are in profit right now. Heading toward Tuesday's UK CPI, I would be prepared to increase the size in appropriate technical conditions. (plan of the trade)

European Currencies look Attractive

I decided to buy Euro and sterling ahead of economic data in Europe. Italian CPI and UK PPI are ahead and I find the technical data appropriate. It is possible to hold positions through Tuesday when UK CPI and French CPI will face US Trade Balance. There was also a supportive article in Bloomberg reflecting a view that recent appreciation of dollar looks unsustainable both technically and fundamentally. (Background)

87 pip profit; Closing the last position

I decided to close the last position, selling EURUSD, just before UK PPI data. If I had more flexibility the reducing the size was absolutely better because I must enter again before tomorrow's German ZEW survey. However, it is not so bad, because I can take time for almost 12 hours.

28 pip made 8.3 percent profit

The position, selling EURGBP closed at support, 0.7985, with 28 pip profit. I think there could be still room to make more profit but the size of the position doesn't give me that flexibility.

Starting the week with high level of uncertainty

Euro-zone Industrial Production is to be released in about 10 hours which is expected to show contraction in May. It is when there is still concern about the future of the Freddie and Fannie. One hour ago, US Treasury announced a possible plan to rescue the two firms; however it is not very clear to me that whether it could calm the markets.

In this situation I decided to start the week. I have sold EURUSD at 1.5941 and 1.5958 in the early trading hours. Also I am short on euro against sterling at 0.8013 which is a position on today's UK Producer Price Index. It is possible to hold both positions until Tuesday when the German ZEW survey could emphasize on the weak side of Euro economy.

First reactions to the Treasury's statement about the rescue plan have been positive so far but it is subject to high level of uncertainty.

Taking 41 pip profit, Trading vs. Gambling

UK's PPI was more than expected, but I closed my position, long on GBPUSD, at 1.9731, one minute before the release, taking 41 pip profit.

Although the pair hit the resistance at 1.9775 just after the report, but I don’t wanted to bet on the news itself.

In fact, I still believe that any position which is opened based on the expected effect from a data should be closed before the release of that data. I see it as the difference between trading and gambling, because the actual data and the possible reactions simply could be completely different.

Going long on GBPUSD

I decided to go long on GBPUSD at 1.9690, targeting 1.9760.
A Buy Limit order is placed at 1.9590, ready to increase the position to 3 times before the PPI report. However I prefer to see 1.9760 before that!

British pound, Inflation, and Monday's PPI

Producer Price Index, especially in output, is likely to support GBP this Monday. 12 hours is left to release and I will go long on GBPUSD as soon as I find a comfortable entry point. I may be more aggressive on this case and ignore the pivot levels.