Forex Markets to Face Inflation Reports, Rate Decision by Bank of Canada

•    UK Consumer Price Index (DEC) – January 19, 4:30 ET
On Tuesday, the release of the UK’s consumer price index (CPI) is projected to show that headline inflation grew 0.3 percent during the month of December, while the annual rate is projected to jump to a nine-month high of 2.6 percent from 1.9 percent. Such an outcome would leave CPI above the Bank of England’s 2.0 percent target, and would likely add to speculation that the central bank will officially end its quantitative easing program in February.  As a result, an increase in CPI in line with or above expectations has potential to push the British pound higher. If the reading is lower than anticipated, though, the currency is likely to pull back.

•    Bank of Canada Rate Decision – January 19, 9:00 ET
The Canadian dollar could see a pickup in volatility on Tuesday at 9:00 ET as the Bank of Canada is expected to leave rates unchanged at 0.25 percent once again. After the Bank left rates unchanged on December 8, they repeated that they would maintain a neutral stance through June 2010, and while this is likely to remain the case once again, the bigger issue to keep in mind is that the Bank is likely to issue revisions to their GDP and CPI outlooks. Indeed, upgrades to their previous forecasts for GDP to rise 3.0 percent in 2010 and 3.3 percent in 2011 have the potential to lead to a sharp rally in the Canadian dollar. However, downgrades to these forecasts, or indications that CPI will not return to their 2 percent target until after Q3 2011 could weigh heavily on the currency.

•    New Zealand Consumer Price Index (4Q) – January 19, 16:45 ET
The steady rise of inflation in New Zealand may have sputtered out in Q4, as the nation’s consumer price index (CPI) is projected to go unchanged from Q3. That said, the annual rate of CPI growth is anticipated to rise to 2.1 percent from 1.7 percent, and with Credit Suisse overnight index swap (OIS) rates are already pricing in 200 basis points worth of rate hikes by the Reserve Bank of New Zealand over the next 12 months, weaker than expected results has the potential to push the New Zealand dollar lower as the markets will shift to price in fewer rate increases. However, CPI proves to be strong, the currency is likely to rally in response.

•    Bank of England Meeting Minutes – January 20, 4:30 ET
The minutes from the Bank of England’s (BOE) January meeting will be released on Wednesday, and while we already know that no changes were made to the Bank Rate, which was left at 0.50 percent, or the Asset Purchase Facility (APF), which was maintained at £200 billion, the news could still impact FX trade. First, the vote count may reflect some difference in opinion amongst the Monetary Policy Committee (MPC) members on the status of the APF. Indications that some MPC members are in favor of further expansions to their quantitative easing program would likely lead to a steep drop in the British pound as it would cause traders to shift their expectations for interest rate decisions in 2010. That said, the decision to leave the APF at its current level was likely a unanimous one, and thus, the British pound could gain.

•    Canadian Consumer Price Index (DEC) – January 20, 7:00 ET
The Bank of Canada has continuously stated that inflation risks remain to the downside, but if more timely measures suggest that they’re actually on the rise, traders may price in a greater probability of rate hikes this year. On Wednesday, the Canadian consumer price index (CPI) is projected to rise by 0.2 percent for the month of December, and could push the annual rate up to 1.8 percent from 1.0 percent. Likewise, the Bank of Canada’s core measure of CPI is anticipated to edge up 0.1 percent for the month, and 1.9 percent for the year, compared to an annual rate of 1.5 percent in November. That said, the impact of the CPI release on the Canadian dollar will depend heavily on how much of an emphasis the Bank puts on inflation during their policy meeting on January 19.

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

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