Rising Prices in Focus with Inflation Data, Central Bank Decision Ahead

Following the European Central Bank rate decision this past week, which marked the beginning of a shift back towards ‘normal’ monetary policies, it is clear that, given President Jean-Claude Trichet’s rhetoric, inflation was the driving factor behind the rate hike. Accordingly, with inflation data due out of Britain and the United States, Bank of England and Federal Reserve inflation hawks will be looking for further evidence to support such a claim for their respective countries. The price action following British CPI data could be limited, however, considering the Bank of England announced on Thursday that it would keep rates on hold despite rising inflation, in order to continue to boost the economy, while a stronger headline figure out the of the United States could spark volatility for Dollar-based pairs on the grounds that speculators will shift their rate hike expectations for the FOMC to a closer date.

• U.K. Consumer Price Index (YoY) (MAR): April 12 – 08:30 GMT

The continued period of low interest rates has put significant price pressure on the British economy, and it appears to be a trend that won’t be bucked anytime soon. Although producer input prices rose by 14.6 percent on a year-over-year basis in March, and consumer prices accelerated by 4.4 percent in February, the Bank of England chose to sustain its key interest rate at 0.50 percent, and maintain its asset purchase program at £200 billion. 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 while rhetoric from Bank of England inflation hawks might increase, the markets will likely ignore such commentary. With growth remaining muted, it appears that the U.K. economy could be entering a state of stagflation – low growth rates and rising prices.Join a DailyFX analyst for live coverage of event!

• Bank of Canada Rate Decision (APR 12): April 12 – 13:00 GMT

Canada has continued to experience moderate growth, with a stable labor market (at a 7.7 percent unemployment rate, down from 7.8 percent in February) and growth in the housing market of recent (housing starts expanded by 188.8K in March, up from 183.7K in February). In fact, on an annualized basis, Canada’s headline GDP figure showed expansion of the economy by 3.3 percent in January. Still, inflation has been relatively contained within Canada, as evidenced by an inflation rate that has hovered around 2.0 percent for the past few months – the CPI figure from February showed a 2,2 percent increase in price pressures on a year-over-year basis. A Bloomberg News survey pegs the rate to remain on hold at 100 basis points on Tuesday, even as the implied futures rate for June is 1.445 percent. The Credit Suisse Overnight Index Swaps shows a minute 4.0 percent of a 25-basis points rate increase at Tuesday’s meeting, though the markets have price 91.0 basis points in over the next 12-months. Accordingly, commentary following the release is crucial, as policymakers could begin to employ more hawkish rhetoric as a shift back towards policy ‘normalization’ appears to be underway.Join a DailyFX analyst for live coverage of event!

• U.S. Advance Retail Sales (MAR): April 13 – 12:30 GMT

As forecasted last month, retail sales figures expanded, continuing a trend of an improvement of consumption in the American economy for the eighth consecutive month. Accordingly, given the sustained environment of improved credit conditions, our bias remains that we can expect to see further gains in the headline advance retail sales figure. A Bloomberg News survey shows that retail sales are forecasted to have expanded by 0.5 percent in March, after growing by 1.0 percent in February. Now that it is becoming evidently clear that the Federal Reserve’s efforts to inject liquidity in capital markets might in fact have had a positive effect on the American consumer, another expansion in sales figures could provide evidence for rate hike enthusiasts that the economy has improved to the point where it is time to wind-down the second round of quantitative easing.Join a DailyFX analyst for live coverage of event!

• U.S. Consumer Price Index (YoY) (MAR): April 15 – 12:30 GMT

In what could possibly be the most important data release over the course of next week, the consumer price index from the U.S. will likely be the single event that sparks the most price action across Dollar-based pairs. Debate has heated up among Federal Reserve policymakers and FOCM voting members, to such a point that there is a clear divide over what direction the American economy is moving: the economy has improved, and a series of rate hikes are necessary by the end of the year (Fisher, Kocherlakota); and there is still significant slack in the economy, and there is no need to wind-down the stimulus plan before its intended ending (Bernanke, Dudley, Lockhart). Nonetheless, the CPI is expected to have grown by 2.6 percent in March, after increasing by 2.1 percent in February, on a year-over-year basis. Hawks are becoming increasingly worried that rising commodity costs – COMEX Gold hit an all-time high this week, while COMEX Silver is at a three-decade high - coupled with higher food prices abroad may be a sign that a sharp increase in price pressure may be on the verge of hitting the American consumer. Join a DailyFX analyst for live coverage of event!

• U.S. U. of Michigan Consumer Confidence (APR P): April 15 – 13:55 GMT

U.S. consumer confidence is forecasted to improve once more in April’s preliminary reading, after declining in March. Still, the figure is expected to remain below 70.0, at a 69.0 consensus, after falling to 67.5 in March following four consecutive readings above 70.0. As noted before the last confidence reading, “[S]hould oil prices remain elevated about $100 per barrel, sentiment could further wane headed into the summer as gas prices typically rise during the middle of the year in the United states.” Accordingly, with oil holding above $110 per barrel now, an erosion in confidence would not be entirely unexpected. Price action for Dollar-based pairs could be stronger-than-usual considering two major U.S. data releases. Join a DailyFX analyst for live coverage of event!

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: research@dailyfx.com