Saturday, February 12, 2011

Critical Week for Dollar, Pound as Key Data Releases to Give Insight on Inflation Debate

With three significant reports expected, next week will give investors
insight into the underlying fundamentals of the U.S. economy which
could cause an increase in volatility for Dollar-based pairs. Tuesday
has the most vital data, starting with the release of the British
Consumer Price Index, interest rate hawks will look for evidence to
bring to somebody's attention rates and start tightening monetary
policy as sustained low rates have flooded capital markets with cash.
Also on Tuesday, the Euro-zone's growth will be examined, and later
in the session U.S. Retail Sales data will be released. Later in the
week, the CPI gauges for the U.S. and Canada will also be released,
both of which are forecast to show continued increases in prices at
the same if not quicker rates than the previous period.

* U.K. Consumer Price Index (YoY) (JAN): February 15 – 09:30 GMT

A continued period of low interest rates appears to be putting
increasing difficulty on the British economy, as inflation
doubtless accelerated in January to its fastest pace in over two
years. Coupled with an increase in the sales tax, rising commodity
prices could push the CPI up by 4.0 percent, according to survey
figures. The CPI grew by 3.7 percent in December. The figure will
mark another data release in which inflation is above the Bank of
England's 2.0 percent threshold for their standard target, and
rhetoric from inflation hawks will likely be ratcheted up as a
result. Previously this week, the Bank of England maintained their
key interest rate at 0.5 percent, while continuing its bond hold
curriculum at £200 billion. With growth remaining muted, it
appears that the U.K. economy could be entering a state of
stagflation – low growth rates and rising prices.

* German Combined Domestic Product s.a (QoQ) (4Q P): February 15 –
07:00 GMT

After diminishing small of expectations last quarter, European
growth expectations have been lowered to rise by just 0.4 percent,
after gaining a slight 0.3 percent in the third quarter of 2010.
German GDP will likely be the more market moving data, but, as it
has been the German economy that has supported a honest share of
Euro-zone growth while many periphery countries struggle. German
GDP is forecasted to grow by 0.5 percent, after expanding by 0.7
percent in the third quarter of 2010. Despite a jobless rate on
hold at 10.1 percent for the Euro-zone, it appears that concerns
over the solvency of some European Union nations – mainly the
PIIGS – have frightened away investors, as investment contracted
towards the end of the year. For much of the following half of
2010, as sovereign debt concerns increased, growth became reliant
on export growth; the trend is expected to hold, as sales growth
from emerging markets will need to be strong in order for the
European Union to experience higher growth rates as uncertainty
surrounds some member nations.

* U.S. Advance Retail Sales (JAN): February 15 – 13:30 GMT

Consumer demand is expected to continue to remain weak, estimates
for Advanced Retail Sales for January have shown. Early survey
figures project sales at 0.5 percent, less than the 0.6 percent
gain in December. A recovery in consumer demand is an vital part of
the U.S. recovery, as modest growth in the labor market has place
increasing difficulty on the Dollar. But, after a slew of
hard-hitting winter storms that unnatural much of the eastern half
of the country, it appears that markets have already priced in the
possibility that the sales data will disappoint. Accordingly,
expectations of increased demand will likely be higher vacant
forward as the weather improves over the next few months.

* U.S. Consumer Price Index (YoY) (JAN): February 17 – 13:30 GMT

As economic releases crossing the wires over the past few weeks
have pointed towards a quicker pace of economic growth in the U.S.,
the release of the CPI on Thursday will weigh heavily on policy
makers as the debate between inflation hawks and doves heats up.
The CPI is expected to have grown by 1.6 percent in January, after
increasing by 1.5 percent in December. While inflation has been
muted thus far in the U.S. following massive injections of
liquidity into the markets, hawks are becoming increasingly
apprehensive that rising commodity costs coupled with higher food
prices abroad may be a sign that a sharp increase in price
difficulty may not be that far off in the U.S. On the other side,
inflation doves have noted that wage growth remains low, and job
growth has not selected up yet, so it remains imperative to
continue to leave rates at historical lows for the time being. The
U.S. CPI release figures to be the most vital release of the entire

* U.K. Retail Sales (MoM) (JAN): February 18 – 09:30 GMT

After diminishing by the most ever in December, U.K. Retail Sales
are expected to make a instant rebound, forecasted to grow by 4.3
percent in January. Sales had fallen by 0.8 percent in December
from November. But, the expectation for such a rebound may be
overzealous, as, despite humanizing weather conditions in Britain
which was to blame for the decline in sales in December, the
government passed a value-added tax in order to help close the
budget shortage. That, as well as rising inflationary pressures,
could have squeezed disposable income for shoppers, leading to a
lower figure. Should the figure disappoint, expect chatter by Bank
of England policy makers to arise on how to fix an economy headed
toward stagflation.

See the DailyFX Calendar for a full list, timetable, and consensus
forecasts for upcoming economic indicators.

Written by Christopher Vecchio, DailyFX Research.

To contact the author of this report, please send inquiries to:


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