Fundamental Comment

This Week: Inflation data on the horizon

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The most important events this week that could weigh on the movements of major currencies will be inflation reports from major economies, as it come amidst tendency from central banks to tighten monetary policy.

Last week, China’s consumer and producer price indices signaled a slowdown in January, hence eyes will focus CPI, PPI data from the United Kingdom and United States.

US Dollar

After getting some relief following the release of buoyant U.S. NFP report on February 2, the U.S. dollar rebounded strongly from the lowest level in three years.

The green currency marked its biggest weekly gain since late October last week, whilst recording its second consecutive weekly advance, on improving U.S. economic data, rising bets of three rate hikes this year, avoidance of government shutdown and climb in U.S. 10-year Treasury yields near four-year highs.

On Wednesday, annual U.S. consumer prices for January may signal steadiness in both original and core readings at 2.1 percent and 1.8 percent respectively. The month-on-month reading is predicted to accelerate to 0.3 percent from a previous of 0.1 percent increase.

Retail sales probably soared 0.5 percent in January, following a 0.4 percent increase in December, according to median forecasts.

Later on in the week, U.S. PPI may witness a 2.5 percent soar in the year ended January and a flat reading on the month.

Inflation "to move up this year and to stabilize around the Committee's 2 percent objective over the medium term," the latest FOMC statement said.

Therefore, inflation data will be of high relevance since it could shape the Fed’s rate hikes trajectory this year.

Euro

The euro failed to maintain its bullish direction last week, signaling its first weekly drop over the last eight weeks, with investors closing their bets against a weak U.S. dollar.

This week, the euro area lacks the release of important economic data, where the most relevant will be the preliminary second-quarter GDP reading for the euro area and the final CPI for Germany.

Meanwhile, the euro could start a downside correction after hitting a three-year high versus the greenback.

Pound Sterling

The pound sterling also plunged against the dollar last week, where hawkish remarks from the Bank of England could not save the sterling from a second straight weekly loss.

The pound slipped to a three-week low despite comments that the BOE could raise interest rates earlier than predicted.

The U.K. will release its annual consumer price inflation index for January this week, where it may settle at the BOE’s upper limit of 3 percent.

Eyes will also focus on retail sales for January, as it may show a 0.9 percent rebound after a 1.5 percent plummet in December.

The data will be watched carefully as it will reflect the strength of consumer spending amidst the current environment of high inflation.

Inflation could accelerate more than 3 percent over the coming few months, but that would be temporary, given the higher import prices caused by the weak pound, BOE Governor Mark Carney said last week.

Commodities

While gold should have benefited from the sharp sell off in global equities, it continued its drop to a five-week low last week, as the firm dollar dented the appeal of the metal as an alternative investment.

Rising bets of an interest rate hike by the Fed next month could add further pressure on gold, pushing it towards $1300 levels.

Regarding oil, it reported its biggest weekly loss in 10 months as the rise in U.S. crude production outweighed efforts by OPEC to balance supply and demand in the energy market.

U.S. output climbed to 10.25 million barrels per day, the latest U.S. government energy report showed.

On the other hand, Iran announced plans to boost its output within the next four years by at least 700,000 barrels a day.

This week, U.S. crude stockpiles probably edged up 0.28 million barrels in the week ended February 9, the EIA government report may show this week.

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