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: cvecchio@fxcm.com