The coming week will be particularly important for the world’s largest economy, with three significant events on the docket for the United States. On the heels of data showing that inflation in the United States continues to tick higher every month, much insight will be gained on the direction of the Greenback over the coming weeks. Starting on Tuesday, the markets will focus on how said inflationary pressures have influenced sentiment among American consumers; coincidentally, on Friday, with the release of growth figures and personal consumption data, it will become evident on whether or not higher pressures are beginning to sap purchasing power for Americans.
The most important data release comes on Wednesday, however, when the Federal Reserve announces its benchmark interest rate for the coming month: the main question everyone is wondering is how the Federal Reserve plans on unwinding its massive asset purchases, mainly U.S. Treasuries, and how that will coincide with the beginning of policy ‘normalization.’
Although it is being overshadowed by the FOMC rate decision later in the day, the release of the German CPI will also be a key event, as rate hike expectations for the European Central Bank have cooled somewhat over the past few weeks, and another jump in price pressures for Europe’s largest economy could provide further ammunition for rate hawks to call for another hike in the key rate.
• U.S. Consumer Confidence (MAR): April 26 – 14:00 GMT
Consumer confidence is expected to remain below 70.0, after falling back below the key level in March. Last month’s reading was identical to that in December, and with a forecasted confidence reading of 64.5, it appears that Americans continue to remain wary about the state of the economy. A housing market, which continues to be a laggard of the recovery, continues to depress consumers’ assurance about the state of the economy going forward. However, with new home sales surging by 12.0 percent in March on a month-over-month basis, a boost in confidence could be seen in the coming months if housing continues to gather momentum.
It’s becoming increasingly clear that broader geopolitical events – including but not limited to the ongoing nuclear crisis in Japan, continued tension in the Middle East and North Africa region, as well as rising price pressures around the globe – have weighed on sentiment over the past few months, as noted by confidence falling back below 70.0 in March, its highest point since February 2008. Another weak reading will set the tone for another tough week for the Greenback, as one would expect a deteriorating outlook for the economy to be followed by less consumption, and depressed growth figures down the road. Join a DailyFX analyst for live coverage of event!
• German Consumer Price Index (YoY) (APR P): April 27 – --:-- GMT
Despite the European Central Bank’s decision at the beginning of the month to increase the key interest rate by 25-bps to 1.25 percent, inflation in Europe’s largest economy is forecasted to continue to creep higher, with Germany’s consumer price index expected to have gained by 2.4 percent in April, on a year-over-year basis. Another jump in the headline CPI reading could renew calls by European Central Bank policymakers for another rate hike; in fact, rate hike expectations have come down from the most recent meeting, with the OIS shows a 32.3 percent chance of the European Central Bank raising interest rates by 25-bps at their meeting in a few weeks; similarly, only 78.9-basis points are priced in for the next 12-months for the European Central Bank, down significantly from the 141.0 expectation on April 11.
Consumer prices have been accelerating an increasingly accelerating rate since August, and the year-over-year inflation rate has been positive every month since November 2009. A reading over 2.0 percent would mark the fourth consecutive month in which the index had gained at such a pace.
• U.K. Gross Domestic Product (QoQ) (4Q): April 27 – 08:30 GMT
While growth in Britainhas been softer than in the other G-7 economies, it is expected to return to positive ground, after having deteriorated by 0.5% in the fourth quarter. The expected reading of 0.5 percent would be modest growth, but slightly slower than the 0.7% growth the economy experienced in the third quarter of 2010. The continued accommodative policy by the Bank of England appears to finally paying dividends, with some key readings of the economy beginning to paint an optimistic picture of the coming months: house prices gained by 0.7 percent in February; the unemployment rate fell to 7.8 percent; consumer confidence gained in March; and manufacturing production gained 4.9 percent on a year-over-year basis in February.
Inflation continues to be a problem for the British economy, however, with the most recent CPI reading showing that price pressures increased by 4.0 percent in March on a year-over-year basis. Considering the data comprising growth are well-documented before the release of the aggregate figure the impact on Pound-based pairs will likely be limited, though if the figure strays significantly from the forecasted number, expect higher-than-usual price action. Join a DailyFX analyst for live coverage of event!
• U.S. Federal Open Market Committee Rate Decision (APR 27): April 27 – 16:30 GMT
The Federal Reserve is widely expected to keep the key overnight interest rate on hold at 25-bps at their meeting on Wednesday, and it seems as if markets agree: according to the Credit Suisse Overnight Index Swaps, there is a zero percent chance that FOMC policymakers vote to hike rates now. The OIS shows that markets are pricing in a rate hike of 36.0-basis points over the next 12-months, slightly higher than the reading before the last rate decision, but down significantly from its peak on April 7 when markets were pricing in 53.8-basis points by the Federal Reserve. Policymakers continue to disregard rising price pressures, even as the CPI expanded by 2.7 percent on a year-over-year basis in March. Accordingly, the PPI was up 5.8 percent in March on a year-over-year basis.
Thus, it appears as if that inflation, which had been contained for some time in the United States, is now forcing producers to pass on the additional costs to consumers, which will likely provoke the FOMC into raising rates sometime in the next few months, just not at the meeting next week. In the coming weeks and months, discussions will arise as to whether or not further stimulus, or a “quantitative easing 3” package will be necessary in the near-future, if the housing and labor markets continue to stagnate. Join a DailyFX analyst for live coverage of event!
• U.S. Gross Domestic Product (Annualized) (1Q A): April 28 – 12:30 GMT
Growth in the world’s largest economy appears to be slowing, with the gross domestic product reading for the first quarter of 2011 expected to show 1.8 percent growth, down from 3.1 percent growth in the fourth quarter of 2010, at an annualized rate. Accordingly, personal consumption is forecasted to have declined to a 2.1 percent clip in the first quarter, down from the fourth quarter rate of 4.0 percent. Consumer spending growth, which had been at its fastest pace in four years, was not only the major reason the economy had recovered, but will be the main reason why overall growth has slowed.
Considering the data underpinning GDP has been known for quite some time, the impact on the Dollar will likely be limited, though if the figure strays significantly from the forecasted number, then expect an impact on the capital markets. 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: cvecchio@dailyfx.com
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