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FOMC Rate Decision and U.S. CPI May Create New Dollar Paradigm

FOMC Rate Decision and U.S. CPI May Create New Dollar Paradigm

2010-03-15 14:01:00
John Rivera, Currency Analyst
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•    Euro-Zone CPI (FEB)  – March 16, 10:00 GMT
Subdued inflation has allowed the ECB to remain on hold as they see risks balance between prices and growth. Forecasts are for a 0.3% rise during February with the annualized reading holding at 0.9%. The pace of price growth is far from the central bank’s target of 2.0% and an inline print may be overlooked by markets. However, a sharp rise could put inflation on a pace to threaten desired levels by mid-year, raising the outlook for interest rates. Markets are pricing in 72 bps of rate hikes over the next twelve months which is the highest since February 11th and up from 49.9 bps at the height of the Greek crisis. A continuation of the rising trend could add to the building bullish Euro sentiment.

•    FOMC Rate Decision  – March 16, 18:15 GMT
Fed funds futures are pricing in a zero percent chance that the central bank will raise rates at their upcoming policy meeting. Therefore, the event risk will come from Fed Chairman Ben Bernanke’s post release statements. Any change in the ongoing rhetoric that rates will remain on hold for an “extended period” could spark a dollar rally. Last month saw Kansas City District President Thomas Hoeing object to using the language and is on record to keep pressuring the committee to drop it from future statements. The voting member in a CNBC interview stated that the FOMC should raise rates “sooner rather than later”. Rising interest rate expectations could see the greenback lose its status as a funding currency and its negative correlation with risk appetite.

•    U.K. Jobless Claims Change (FEB) & BoE Minutes– March 17, 09:30 GMT
The release of the BoE minutes will garner significant focus as the central bank left the door open for further quantitative easing at their last policy meeting. Markets will look for insights to see if this is merely a precaution or current conditions has the MPC on the verge of adding to their 200 billion pound asset purchase program. The latter could lead to a surge in bearish sterling sentiment, erasing recent gains. Chief economist Spender Dale in a recent speech stated that the central bank will extend its QE program if needed , but acknowledge tentative signs that nominal spending is starting to accelerate.

The U.K. employment report could be overshadowed by the policy meeting minutes but labor trends hold significant implications for future growth. Economists are forecasting that the number if unemployed increased by 6,000 with the claimant count rate holding at 5.0%. A greater than expected job loss will dim the outlook for future tightening regardless of the MPC’s current stance on additional measures. An unexpected decline in the labor gauge could significantly raise yield expectations as it would be the third time in the last four months the economy didn’t lose jobs.

•    U.S. Consumer Prices (FEB) – March 18, 12:30 GMT

After markets digest the FOMC’s post rate decision comments the focus will turn toward consumer prices. Accelerating inflation will make it prohibitive for policy makers to keep rates low for too long. Expectations are for inflation to have eased to 2.3% from 2.6% which would allow the central bank to remain on hold. Prices are expected to have rising 0.1% during the month but weak consumer demand has forced retailers to continue discounts in order to attract customers.

•    Canadian Consumer Prices (FEB) – March 19, 12:30 GMT
Like its neighbor to the south Canadian consumer prices are forecasted to have slowed to 1.4% from 1.9% on an annualized basis despite a 0.3% gain during the month. Following consecutive months of strong job growth, inflation expectations are starting to rise as the outlook for consumer demand improves. The BoC has pledged to keep rates on hold until June unless price growth accelerates at an uncomfortable pace. An inline print will leave prices well below their 2.0% target, but an unexpected rise will garner policy maker’s attention. A rise in interest rate expectations could see the “loonie” extend its recent gains.

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

Send questions or comments to jrivera@dailyfx.com
 

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