Talking Points:

British Pound May Not Sustain Gains if CPI Data Offers an Upside Surprise
US Dollar Looking to Fed-Speak for a Lifeline, Plosser and Fisher in Focus
Yen, Aussie Sold as US Yields Recover Amid Churning Fed Policy Speculation

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December’s UK CPI data takes top billing on the economic calendar in European hours. Expectations call for the headline year-on-year inflation rate to remain at 2.1 percent, unchanged from the prior month. Manufacturing- and service-sector PMI readings for the same period pointed to accelerating price growth however, leaving the door open for an upside surprise. Such a result may offer a near-term boost to the British Pound, but recent chatter about the possibility that the Bank of England will revise its forwardguidance framework to ward off tightening speculation may swiftly cap upward momentum.

Later in the day, the spotlight returns to the US as markets ponder the fate of the Federal Reserve’s QE “tapering” process in the aftermath of December’s dismal employment data. Atlanta Fed President Dennis Lockhart struck a hawkish tone yesterday but his remarks failed to prevent a breakdown of the US Dollar. The “Fed-speak” docket heats up today as Charles Plosser and Richard Fisher – presidents of the Philadelphia and Dallas Fed branches – take two the wires. Unlike Lockhart, both Plosser and Fisher are voting members of the rate-setting FOMC committee in 2014. That means their remarks may carry added weight and offer the greenback a lifeline if they too voice support for reducing asset purchases.

On the data front, traders will be watching December’s US Retail Sales report. Economists’ forecasts point to a 0.1 percent increase from November, marking the softest outcome in three months. While a slowdown in retail activity during a holiday-heavy month of the year doesn’t bode well, the release may not generate lasting US Dollar selling in and of itself. Many of the arguments made to explain December’s miss on payrolls – especially those of the weather-related variety – can be applied to a drop in receipts growth as well. With that in mind, a slowdown won’t necessarily offer anything new into the conversation and may be overshadowed by the aforementioned commentary from Fed officials if they opt for a hawkish lean.

The Australian Dollar and the Japanese Yen underperformed in overnight trade, sliding as much as 0.4 and 0.7 percent respectively against their leading counterparts. The move appears to be corrective after both currencies scored strong gains yesterday. Not surprisingly, the moves tracked a rebound in US 10-year Treasury yields as the two rates-sensitive currencies continued to reflect gyrations in the markets’ Fed policy outlook.

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Asia Session:

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NZD

NZIER Business Opinion Survey (4Q)

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