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Global Inflation Data, FOMC and SNB Meetings In Focus Post-EU Summit

Global Inflation Data, FOMC and SNB Meetings In Focus Post-EU Summit

2011-12-12 11:00:00
Christopher Vecchio, CFA, Sr. Currency Strategist

The anticipated sideways trading range came to fruition last week as market participants eagerly awaited the outcome of yet another Euro-zone summit. Unlike prior post-summit reactions, no major rally was evident last week. Instead, markets meandered higher while the U.S. Dollar softened slightly, but nothing major transpired. I would argue that this is the exact opposite reaction that was desired: a strong day on Friday would have shown that confidence was restored; instead, such was not the case.

One needs not look further than credit markets for a better gauge of where capital was being allocated in wake of the recent “progress.” With Italian and Spanish bond yields rising and widening against their American and German counterparts, the rally by equity markets and away from the U.S. Dollar appeared to be nothing more than some short-term churning. It is of my firm belief that credit markets lead other asset classes, and with Italian and Spanish bonds starting to correct towards their fair values (higher yields, lower price), the major currencies, especially the Australian Dollar and the Euro, are expected to move lower against the U.S. Dollar in the coming periods.

With that said, in terms of scheduled event risk for the coming week, the docket is significantly thinner than last week. Regardless, there are still events worth watching for as market participants fully digest the results of last week’s summit. American, British, and European inflation data are due over the course of the week, beginning Tuesday. The most important event of the week might be the Swiss National Bank quarterly policy meeting, as there have been rumors that the SNB may raise the EUR/CHF floor to as high as 1.3000.

GBP United Kingdom Consumer Price Index (YoY) (NOV): December 13 – 09:30 GMT

It’s clear that the continued period of low interest rates employed by the Bank of England has allowed inflationary pressures to move in on the British economy, with the consumer price index forecasted to show price pressures at 4.8 percent in November.The global slowdown and impending credit crunch is weighing on prices of recent, as the inflation rate jumped to 5.2 percent in September, its highest rate in three years. The Bank of England is ready to sacrifice purchasing power for economic growth, as evidenced by the Monetary Policy Committee’s decision to leave the key interest rate on hold at 0.50 percent at their most recent meeting, so the 5.1 percent rate for October is reasonable.The British Pound is unlikely to find sustained bids on the higher rate of inflation as interest rate expectations are completely depressed. Join a DailyFX analyst for live coverage of event!

USD United States Advance Retail Sales (NOV): December 13 – 13:30 GMT

Consumer demand is expected to have steadiedin November, as a Bloomberg News survey shows that the median estimate for advance retail salescomes in at 0.5 percent, in line with the October print. The September reading was the strongest print since February, when retail sales surged by 1.3 percent. Given the forecast for November and the actual print for October, the print for September appears to have been a bit of a fluke. Consumer demand is the most important component for U.S. growth, as it comprises nearly 70 percent of the aggregate GDP figure. Join a DailyFX analyst for live coverage of event!

USD Federal Open Market Committee Rate Decision: December 13 – 19:15 GMT

It is widely anticipated at the Federal Open Market Committee rate decision on December 13 that the Fed Funds rate will be kept unchanged between 0.00 and 0.25 percent. The key part of the meeting to watch will be Federal Reserve Chairman Ben Bernanke’s commentary in regards to the labor market recovery in the United States; the unemployment rate ticked lower to 8.6 percent in November.

In the inter-meeting period, rumors have floated that the Federal Reserve is considering another round of quantitative easing, similar to the first round of purchases that were intended to prop up the struggling housing market. This will likely be discussed at the meeting on Tuesday. However, the economic climate is slightly different now than it was this time last year. In fact, while deflation was a major concern, inflation in the United States moved higher to 3.9 percent year-over-year in September, a clear sign that prices are unstable. Considering many have ridiculed the bond purchase program due to its tendency to inflate prices on a nominal basis, the additional round of easing will have many dissenters, including some within the Federal Reserve. The FOMC meeting will be the most important event of the week, as it appears policymakers will need to be increasingly creative in the periods ahead to stoke growth. Join a DailyFX analyst for live coverage of event!

CHF Swiss National Bank Rate Decision: December 15 – 08:30 GMT

The Swiss National Bank will hold its quarterly monetary policy meeting on Thursday, and it is expected to go off with a bang. Although the target rate for the SNB is technically at 0 percent, deflationary pressures remain a concern for the Swiss economy. The combination of low growth, low inflationary pressures, and low unemployment make it hard to jump start an economy that is near full capacity. As such, one method that has been employed to help the economy has been to devalue the Franc. On September 6, the SNB announced it would hold the 1.2000 floor for the EUR/CHF, and recent speculation has arisen that the SNB will move the floor to 1.2500 or 1.3000. As such, if there is a move to raise the floor, we expect the USD/CHF and precious metals (as an alternative safe haven) to appreciate in value. Conversely, if the floor is not raised, the Franc could firm across the board. The SNB rate decision is the most important event of the week. Join a DailyFX analyst for live coverage of event!

United States Consumer Price Index (YoY) (NOV): December 16 – 13:30 GMT

According to a Bloomberg News survey, economists forecast the U.S. consumer price index to moderate, with the median estimate calling for a slight 0.1 percent bump in November, on a monthly basis. The year-over-year figure is expected to hold at 3.5 percent.. The core figure, which excludes the more volatile food and energy components, is forecasted to hold at 2.1 percent on a yearly-basis. Considering this figure has been subdued relative to the headline figure, Federal Reserve Chairman Ben Bernanke has suggested that inflation remains “transitory,” leaving open the door to further quantitative easing.

The objective of the Federal Reserve’s quantitative easing stimulus program was to achieve a target inflation rate of about 2 percent. If price pressures continue to increase, this could provide evidence for hawkish Federal Reserve officials to resist calls for further easing and instead continue solely with ‘Operation Twist.’ Join a DailyFX analyst for live coverage of event!

Rate Hike Probabilities / Basis Point Expectations (12-months)

Global_Inflation_Data_FOMC_and_SNB_Meetings_In_Focus_PostEU_Summit_body_Picture_1.png, Global Inflation Data, FOMC and SNB Meetings In Focus Post-EU Summit

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

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com.

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com.

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