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How will Rising Price Pressures and FX Interventions Affect the Dollar in the Week Ahead?

How will Rising Price Pressures and FX Interventions Affect the Dollar in the Week Ahead?

2011-03-18 23:15:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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If inflation was not a credible threat to undermining the global recovery, the tumultuous events of the past week have absolutely made that a reality. Following the deadly earthquake and tsunami in Japan that tragically left thousands dead and missing, and millions more displaced without food, power, and/or shelter, the Bank of Japan was forced to inject approximately ¥55.6 trillion ($700 billion) into the capital markets in order to prevent a full liquidity drain. With other central banks intervening to prevent the Yen from appreciating further, coupled with the fact that rates now must remain lower in order for some time in order to ensure the crisis in Japan does not derail the global recovery, price pressures could increase at an alarming rate. The following five events could give insight into how the markets plan on dealing with what is the delicate balance between pumping liquidity into the financial system to ensure growth and overheating economies.

  • U.K. Consumer Price Index (YoY) (FEB): March 22 – 09:30 GMT

Another period between policymakers’ meetings, and thus exists another month of low interest rates for the British economy. Price pressures have been increasing for the British economy, with inflation having accelerated to its fastest pace at 4.0 percent in over two years. According to survey figures, inflation in February is expected to have jumped at an even quicker pace, with a Bloomberg News survey showing that the median expectation is for the CPI reading to come in at 4.2 percent. 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.

  • Canadian Retail Sales (MoM) (JAN): March 22 – 12:30 GMT

Retail sales data surprised economists last month, falling by 0.2 percent versus a forecast of 1.0 percent.The fall was attributed to a slide in the number of cars purchased, though fourth quarter sales rose at an annual rate of more than 5.0 percent in volume terms, suggesting that consumer demand has increased steadily. Nonetheless, consumer spending growth could slow in 2011, as Canada is facing record debt levels, according to a statement issued by the Bank of Canada in January. The headline figure last month was not as nearly as bad as the market perceived it to be, however; excluding cars, sales had risen by 0.6 percent, which suggests that a rebound if not a neutral figure from automobile sales in January will lead to positive sales growth. Join a DailyFX analyst for live coverage of event!

  • Bank of England Monetary Policy Committee Meeting Minutes: March 23 – 09:30 GMT

The Bank of England is kept their interest on hold at 50-bps at their most recent meeting, as expected. The Overnight Index Swaps showed there was a 17.0 percent chance that Bank of England policymakers would raise rates by 25-bps, and at the time, the OIS also showed that the markets were pricing in 81-bps in over the next 12-months. However, the most recent OIS reading shows that interest rate expectations have fallen to 59-bps since the meeting. Nonetheless, after the European Central Bank’s president last month left specific phrases out of his post-meeting commentary regarding whether or not “rates remain appropriate,” the minutes from the most recent meeting assuredly will be combed for similar idioms that could give the broader market insight into how Bank of England policymakers feel. As David Song noted in the GBP/USD pair forecast for the week, “the central bank may show an increased willingness to gradually normalize monetary policy over the coming months in an effort to stem the risk for inflation.”Join a DailyFX analyst for live coverage of event!

  • European Union Summit in Brussels: March 24 and 25

The Euro rallied to a fresh yearly high of 1.4138 on Friday as traders are becoming increasingly confident in the outcome of the European Union summit on Friday, which will discuss ways to have coordinated policies among Euro-zone and non-Euro-zone economies alike to help the continent return to sustainable growth, tempered and contained inflationary pressures, as well as long-term job growth. However, the risk of contagion certainly still exists, and the EUR/USD pair may face some downward pressure in the coming days ahead of the meeting. European Central Bank board member Gertrude Tumpel-Gugerell argued that the region needs a “quantum leap” to strengthen its economic governance, as the European Central Bank has hinted at a rate hike as soon as next month. It is worth noting that the European Central Bank maintains that its only mandate is to ensure price stability, and thus in recent weeks inflation expectations have simmered. However, with the turmoil in the MeNa region spreading, coupled with the disaster in Japan, it is possible that no accord could be reached at the summit, which would drive the Euro-based pairs lower.

  • U.S. Gross Domestic Product (Annualized) (4Q T): March 25 – 12:30 GMT

An adjustment of the reading in February, the gross domestic product data due on Friday will be important, but not as market moving as the original release. The revision presented is expected to show 3.0 percent in fourth quarter GDP at an annualized pace, as opposed to the 2.8 annualized rate presented at the last reading. The two figure preceding the release that are will give traders insight into how the U.S. is recovering are the durable goods orders from February, which are expected to have risen by 1.2 percent after expanding by 3.2 percent in January. Also, personal consumption, released with the GDP report, is forecasted to have increased by 4.1 percent in the fourth quarter, the same figure as the third quarter; this suggest that consumption has helped buoy the recovery, as the consumption component accounts for 70 percent of GDP. 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.

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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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