The US dollar, British pound, euro, and Canadian dollar ALL face significant event risk this week. However, volatility may be contained to two days, as the most important releases will hit the wires on Tuesday and Wednesday. If there is one thing to watch, though, it will likely be Federal Reserve Chairman Ben Bernanke’s testimony to the Senate on Tuesday, as his commentary has proven to be a tried-and-tested mover for the US dollar, US equities, and Treasuries.
• [B]UK Consumer Price Index - July 15[/B]
On Tuesday at 4:30 EDT, UK consumer price growth is expected to accelerate even faster to a 3.6 percent annual pace, which would mark the sharpest rise since July 1992. Inflation remains of great concern to the Bank of England, especially as the Bank’s Governor Mervyn King forecasts that CPI will rocket above 4 percent. However, unlike the European Central Bank, which raised interest rates in early July, the BOE has a dual mandate to maintain price stability and to promote sustainable growth and employment. The UK has already seen indications of a broad economic slowdown, but adding the fragile nature of the UK’s financial sector to the mix puts the Bank of England in a particularly precarious position, as a rate increase meant to fight inflation could easily push the UK into recession and trigger a severe credit crisis. As a result, the UK’s MPC will likely continue to sound hawkish on inflation in order to contain consumer inflation expectations, but when it comes down to it, their bark may be bigger than their bite, as the Bank of England is highly unlikely to actually raise rates during the third quarter. Nevertheless, very strong UK CPI figures could lead the British pound to rally upon release, while soft reading could weigh the currency down.
• [B]US Advance Retail Sales, Bernanke Gives Semiannual Monetary Policy Testimony at Senate– July 15[/B]
Advance Retail Sales are expected to rise 0.3 percent after jumping 1.0 percent gain during the month prior, but given the current economic scenario, this figure could be deceiving when announced at 8:30 EDT. Indeed, consumer confidence remains at dismal levels and energy prices continue to skyrocket. Nevertheless, there is potential for the Advance Retail Sales index to show a positive increase as the result of prices, namely, sales at fuel stations and of food. Further evidence of this was seen in the most recent ICSC sales report, as it reflected a pickup in spending on consumer staples at discounters and wholesale clubs, while consumption of non-necessities, such as luxury goods, apparel, and furniture, all plummeted. The reaction of the US dollar may be limited, however, as Federal Reserve Chairman Ben Bernanke will testify at 10:00 EDT to the Senate on monetary policy. His commentary tends to be extremely market-moving for not only the greenback, but also for US Treasury and equity markets (and thus, the Japanese yen crosses). Given the uncertainty surrounding the solvency of Fannie Mae and Freddie Mac, commentary on the financial markets will be watched closely and bearish sentiment by Mr. Bernanke could weigh heavily on risk-appetite. On the other hand, if Mr. Bernanke signals optimism that the US economy and financial sector can weather the storm, the US dollar and risky assets, in general, could gain.
• [B]Bank of Canada Rate Decision – July 15[/B]
According to a Bloomberg News poll of economists, the Bank of Canada is anticipated to leave rates steady at 3.00 percent on Tuesday at 9:00 EDT. The news will come following that Bank of Canada’s surprise decision last month, as they had widely been expected to cut rates, but instead, left rates unchanged as they called rates “appropriately accommodative”. While the Bank remains cautious about the downside risks to growth, especially those stemming from a probable recession in the US, prices in Canada are soaring as headline CPI jumped above their 2 percent target to 2.2 percent. The data only underpinned the Bank’s view that “the balance of risks to the Bank’s April projection for inflation in Canada has shifted slightly to the upside.” Furthermore, the Bank said last month that if “current levels of energy prices persist, total CPI inflation will rise above 3 percent later this year.” Clearly, the risks are in favor of no change in policy, but the Canadian dollar is most likely to show an immediate reaction to the policy statement and the bias that it reflects, with a hawkish stance providing a bullish push for the currency, while a more cautious and dovish stance could weigh the Loonie down. Discuss the rate decision and the Canadian dollar with other traders in the USD/CAD Forum.
• [B]Euro-zone Consumer Price Index – July 16[/B]
Euro-zone CPI figures for June are not expected to be revised from initial estimates of a 4.0 percent annual increase – a more than 16-year high – and such a result is unlikely to stoke volatility in the euro. However, if CPI is revised higher, the news would be extremely bullish for the euro, especially since the European Central Bank has already raised rates in June to 4.25 percent and ECB President Jean-Claude Trichet remains hawkish. On the other hand, a downward revision could lead the euro to sell-off sharply.
• [B]US Consumer Price Index, FOMC Meeting Minutes from June 24-25 – July 16[/B]
The US headline consumer price index for the month of June is expected to rise 0.7 percent upon release at 8:30 EDT, while the annual rate of growth is forecasted to jump to a nearly 3-year high of 4.5 percent. A bulk of the increase will likely be the result of food and energy price gains, especially as oil hit a fresh record above $140/bbl. Meanwhile, core CPI is anticipated to show a mild 0.2 percent rise for the month, which would leave the annualized reading at 2.3 percent. However, if any of these figures surprise to the upside or downside, the markets will respond accordingly and the moves could be dramatic. On the other hand, if the CPI figures are in line with expectations, Treasuries, the US dollar, and US stock markets may simply trade quietly ahead of the release of the minutes form the FOMC meeting on June 24-25 at 14:00 EDT. During that meeting, the Fed left rates steady, though one member – Richard Fisher – actually voted for a rate increase. The key thing to watch for in the release of the minutes is the commentary amongst the FOMC members regarding inflation, especially in light of record oil prices. Currently, fed fund futures are betting that the Fed will leave raise rates by year-end. However, if the FOMC members brush off the inflation factors and focus instead on shaky financial market conditions and the significant US economic slowdown, futures may start to become more aggressive in pricing in either steady rates or even a cut, which could weigh heavily on the US dollar.
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See the DailyFX Calendar for a full list and timetable of upcoming event risks.
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