Data is thin in the coming week with few pieces due across the globe that are likely to have a long-term material impact on price action in any of the majors. However, in light of recent developments – mainly, the expectation that the European Central Bank and/or the Federal Reserve will unveil major accommodative policies in the coming weeks – there are some data due that could be crucial in the debate policymakers will entertain going forward.
Mainly, we look to European growth and inflation data over the coming days, as well as inflation data out of Canada and the United States. Given the light data stream, and even lighter trading volume in global markets (the S&P 500 just had its weakest five-day volume average since late-December / early-January), news headlines could stir more volatility than usual.
08/14 Tuesday // 08:30 GMT: GBP Consumer Price Index (JUL)
Price pressures in the United Kingdom abated further in July, according to a Bloomberg News survey. The year-over-year Consumer Price Index rate fell to +2.3% from +2.4% last month, while Core CPI held steady at +2.1% y/y, marking two and one-half year lows for price pressures in the British economy. Still, this would represent a reading above the Bank of England’s medium-term target of +2.0%.
Overall, as long as inflation remains above target, it is likely that policymakers remain reticent for further action; however, with the monthly-basis showing deflation of -0.1% from -0.4% in June, a further drop in price pressures could spur further accommodative policy, which would damage the British Pound. The key pairs to watch are EURGBP, GBPJPY, and GBPUSD.
08/14 Tuesday // 09:00 GMT: EUR Euro-zone Gross Domestic Product (2Q A)
The European sovereign debt crisis continues to weigh on growth prospects in the world’s largest common market, as German-mandated austerity measures cut government spending and pare disposable income among consumers. According to a Bloomberg news survey, second quarter growth in the Euro-zone contracted by -0.4%, a steeper decline than the -0.1% reading in the first quarter. This would be the weakest reading since the fourth quarter of 2009, when the Euro-zone region contracted by -2.3% y/y.
Also due out is the second quarter German GDP reading, which is forecasted to show modest growth all around (+0.2% q/q forecasted from +0.5% q/q, +1.1% y/y forecasted from +1.2% y/y). We suspect a sharper decline in German growth will be necessary for the Bundesbank to relent on its position against further accommodative policies by the European Central Bank. In this case, a strong German GDP figure and a weak Euro-zone GDP figure would be the most bearish case, while any weak German GDP reading could prove to be bullish. Our base-case is for Euro weakness following these releases. The key pairs to watch are EURJPY and EURUSD.
08/14 Tuesday // 12:30 GMT: USD Advance Retail Sales (JUL)
The US economy has seen data pick back up in recent weeks, and the July Advance Retail Sales report should follow this trend. Forecasts show that the consensus expectation is for modest growth of +0.3% growth last month, after sales dropped by -0.5% in June. Overall, sales have increased by +0.79% thus far in 2012, and if the actual meets expectations, sales will have risen by +1.10% this year. Considering the pent up expectations from more stimulus from the Federal Reserve, it is likely that a disappointing print spurs some risk-appetite, with the US Dollar selling off thereafter. If the print beats, expect the US Dollar to steady or enhance its gains. The key pair to watch is USDJPY.
08/15 Wednesday // 12:30 GMT: USD Consumer Price Index (JUL)
In what has become a more closely watched print, the US Consumer Price Index for July poses an under the radar threat the US Dollar this week. As Federal Reserve policymakers have publicly debated the merits of a third round of quantitative easing, doves (those for more easing) have suggested that inflation is contained and not a threat to the US economy, while hawks (those against more easing) have suggested that inflation has already done enough harm to the economy.
Both sides have points: core inflation (ex energy and food) is relatively sticky; but wage growth hasn’t kept pace with inflation, so purchasing power for consumers has been steadily decreasing. Consensus forecasts show that the rate of inflation rebounded in July, to +0.2% month-over-month from 0.0% m/m in June. On a yearly-basis, headline inflation fell to +1.6% from +1.7%. The Core CPI reading is forecasted to hold at +2.2% y/y, however, meaning that hawks continue to have the upper hand in this debate (the Federal Reserve’s target is +2.0% over the medium-term). Stronger readings are bullish for the US Dollar; weaker readings are bearish. The key pairs to watch are EURUSD and USDJPY.
08/16 Thursday // 09:00 GMT: EUR Euro-zone Consumer Price Index (JUL)
Price pressures in Europe aren’t waning; at least that’s what forecasters believe that’s what happened in July. The consensus forecast provided by a Bloomberg News survey shows that the Consumer Price Index contracted by -0.5% in July, on a monthly-basis, although headline price pressures remained constant at +2.4%, on a year-over-year basis. Perhaps more important, the Core CPI reading, is expected to tick higher from +1.6% in June to +1.7% last month.
This is particularly important as it suggests that the immense amount of liquidity dumped in the system by the European Central Bank since December 2011 – roughly €1.1 trillion – is finding its way into the real economy. If this is the case, we suspect German opposition to further accommodative policies by the European Central Bank will be staunch. Stronger readings are Euro bearish, whereas weaker readings are likely Euro bullish. The key pairs to watch are EURGBP, EURJPY, and EURUSD.
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--- Written by Christopher Vecchio, Currency Analyst
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