Talking Points

• Pound May See Boost if Energy Costs Produce Upside CPI Surprise
• Bernanke in Focus as Oil Gains Rekindle Fed Stimulus Speculation
• Australian, NZ Dollars Slump as China Increases Fuel Prices Again

UK Consumer Price Index figures headline the calendar in European hours. Expectations call for the headline yearly inflation rate to decline to 3.3 percent in February, marking the fifth consecutive decline and the lowest reading since November 2010. A print in line with expectations is unlikely to materially change the outlook for Bank of England policy and so ought to have relatively limited implications for the British Pound.

With that in mind, an unexpected boost from oil prices that has appeared in a number of other country’s CPI readings creates the possibility for an upside surprise. Indeed, UK benchmark Brent crude prices jumped 10 percent in February, marking the largest increase since May 2009. Such an outcome may weigh on additional QE expectations and so could offer Sterling some support.

Later in the day, the spotlight will turn toFed Chairman Ben Bernanke as he delivers the first in four lectures at George Washington University. The exercise is part of the central bank’s recent push for transparency, with Mr Bernanke expected to lean heavily on clarifying the steps the Fed took during and in the immediate aftermath of the 2008 global credit crunch and subsequent recession. Although not a regular policy speech at face value, the outing allows for ample opportunity for the Chairman to touch on the outlook for policy going forward.

As wediscussed yesterday vis-à-vis commentary from NY Fed President Dudley, dovish commentary in light of emerging worries about oil’s ability to derail the US recovery, replaying what happened in late 2010 – early 2011, is likely to weigh on theUS Dollar.Alternatively, a neutral outcome echoing this month’s FOMC statement that acknowledges the run-up in oil prices but doesn’t hint at policymakers’ readiness to provide near-term support is likely to have the opposite effect.US Housing Starts andBuilding Permits data are also on tap, with narrow improvements expected on both fronts.

The greenback rose against its leading counterparts in overnight trade as Asian stocks declined, reigniting safe-haven demand for the benchmark currency. Regional bourses fell afterChina raised fuel prices, tacking on 7 percent to the price of gasoline and 7.8 percent to that of diesel after last week’s sharp run-up in crude oil. This marked the second such move from the administration in Beijing in less than six weeks and stoked fears that higher energy costs will further slow the world’s second-largest economy after itset its 2012 growth target at the lowest since 2004 two weeks ago.

The growth-linkedAustralian and New Zealand Dollars saw outsized losses, down as much as 0.6 and 0.5 percent against their US namesake, respectively. The Aussie gained briefly following the release ofminutes from this month’s RBA policy meeting but support was quick to evaporate. Although the bank judged that downside risks to growth were now “somewhat less likely” to materialize and predicted inflation would stay on target over the medium term – weighing against near-term rate cut prospects – the statement offered little new information that didn’t already appear in thepolicy statement earlier this month.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

---Written byIlya Spivak, Currency Strategist forDailyfx.com

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