Global Inflation Data in Focus as Weak NFPs Disrupt Dollar Rally

Talking Points:
– Second full week of the month brings a lighter calendar.
– Inflation data out of UK, Euro-Zone, and US on focus.
– Watching to see how post-NFP trends develop.

Currency markets were thrown into a tailspin on Friday after the December US Nonfarm Payrolls report showed the weakest month of jobs growth since early-2011, offering a new, confounding view of which direction the US economy headed as 2014 arrived. Now, with two central bank meetings have come to pass, focus immediately shifts to next week’s FOMC meeting, the last under Chairman Ben Bernanke’s watch.

This week, the economic docket is filled with several noteworthy pieces of fundamental event risk, but the hurdle is still high for these sparks to truly ignite volatility and broader trend development – especially since no events are as important as last week’s ECB meeting or US NFPs, for example. From the range of meaningful releases on the docket, we are picking ones that are good for short-term volatility (the Aussie jobs data and US consumption) or tap into the policy expectations (US, UK CPI) in the immediate future.

Rate Hike Probabilities / Basis-Points Expectations

See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators. See all of this week’s “high”importance events.

01/14 Tuesday // 09:30 GMT: GBP Consumer Price Index (DEC)
Amid a flurry of incoming, near-term data disappointing, the British Pound finds itself on uneasy footing in the second week of January. The December inflation report could prove to be the bearish catalyst needed for the Sterling to give back some more of its recent gains.

Currently, the Consumer Price Index is expected at +2.1% (y/y) while the Core CPI is due at +1.8% (y/y), both representing multi-month (and in the case of the Core reading) multi-year lows. Confirmation that a relatively stable, if not cooling price environment, might be the green light the Bank of England needs to turn up the dovish rhetoric at its February meeting should it desire to extend forward guidance (beginning to look that way).

Survey: +2.1% (y/y) (unch)
Prior +2.1% (y/y)

The key pairs to watch are EURGBP, GBPAUD, and GBPUSD.

01/14 Tuesday // 13:30 GMT: USD Advance Retail Sales (DEC)
Following the weakest Non-Farm Payroll print since January 2011, the US Dollar needs key incoming data like the December sales report to insulate from further losses. With the holiday shopping season key to domestic consumer spending and thus the US economy, market participants will be looking for a strong Retail Sales print to justify holding the US Dollar into next week’s FOMC meeting (Ben Bernanke’s last as Chairman of the Fed).

Survey: +0.3% (m/m)
Prior: +0.7% (m/m)

The key pairs to watch are EURUSD and USDJPY.

01/16 Thursday // 00:30 GMT: AUD Employment Change (DEC)
Although the Australian Dollar’s losses seen at the end of 2013 have slowed as the calendar has turned, any rebound possible this week may hinge on the outcome of the December labor report.Reserve Bank of Australia GovernorGlenn Stevens used strong dovish rhetoric some weeks ago to make clear that the AUDUSD should stay below $0.9000, with a preference for it to trade closer to 0.8500. A beat here will help the Aussie maintain post-NFPs momentum, though a miss would fit into the broader fundamental narrative of commodity currency weakness.

Survey: +10.0K; Unemployment Rate at 5.8% (unch)
Prior: +21.0K; Unemployment Rate at 5.8%

The key pairs to watch are AUDUSD and AUDNZD.

01/16 Thursday // 10:00 GMT: EUR Euro-Zone Consumer Price Index (YoY) (DEC F)
Disinflation and the threat of deflation remain a headache for the European Central Bank moving into 2014. In President Mario Draghi’s statement following the January rate decision, the central bank president made clear that the German contribution to the Euro-Zone reading was distorting the overall picture; and indeed, it is likely that prices remains softer than what official figures suggest.Inflation is likely to remain pinned lower over the foreseeable future in Europe as consumption trends have yet to truly reemerge.

Survey: +0.3% (m/m), +0.8% (y/y)
Prior: -0.1% (m/m), +0.7% (y/y)

The key pairs to watch are EURGBP and EURUSD.

01/16 Thursday // 13:30 GMT: USD Consumer Price Index (MoM) (DEC)
This is one of the more important dataahead of the January FOMC next week, as the committee grapples with the notion of another round of QE3 tapering. Already in the wake of Friday’s job report have Fed speakers come forward and said that one individual labor market report doesn’t influence the Fed,suggesting that another round of tapering is possible.

As such, this inflation reading may provide as a consensus building factor among market participants as inflation readings remain key to Fed action or inaction on reducing asset purchases. A meet or beat of the +0.3% (m/m) survey would help upend USD weakness from the disappointing December NFP report.

Survey: +0.3% (m/m), +1.5% (y/y)
Prior: 0.0% (m/m), +1.2% (y/y)

The key pairs to watch are EURUSD and USDJPY.

— Written by Christopher Vecchio, Currency Analyst and Gregory Marks, DailyFX Research

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
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Source: Daily fx