Saturday, February 19, 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 important data, starting with the release of the British
Consumer Price Index, interest rate hawks will look for evidence to
raise rates and begin 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
faster 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 pressure on the British economy, as inflation probably
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 medium 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
purchase program 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 Gross Domestic Product s.a (QoQ) (4Q P): February 15 –
07:00 GMT

After falling short 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, however, as it has
been the German economy that has supported a fair 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 scared away investors, as investment contracted
towards the end of the year. For much of the second 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. Initial survey
figures project sales at 0.5 percent, less than the 0.6 percent
gain in December. A recovery in consumer demand is an important
part of the U.S. recovery, as little growth in the labor market has
put increasing pressure on the Dollar. However, after a slew of
hard-hitting winter storms that affected 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 going
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 worried
that rising commodity costs coupled with higher food prices abroad
may be a sign that a sharp increase in price pressure 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 picked
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 important release of the entire week.

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

After falling by the most ever in December, U.K. Retail Sales are
expected to make a quick rebound, forecasted to grow by 4.3 percent
in January. Sales had fallen by 0.8 percent in December from
November. However, the expectation for such a rebound may be
overzealous, as, despite improving 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 deficit. 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:


No comments: