The US Dollar recovered sharply against all G10 counterparts through the past week of trading, setting the stage for a broader Greenback recovery after registering bearish sentiment extremes following months of declines. A flight to safety was ostensibly the reason for the USD recovery, but fresh multi-year highs in the US S&P 500 hardly suggest risk sentiment has suffered. We have long argued that the US Dollar stood to recover noticeably from important bearish sentiment extremes. And though it is extremely difficult to time reversals, recent price action suggests that the Greenback could continue to strengthen in the week ahead. A busy week of US economic event risk promises considerable volatility in the days ahead. Advance Retail Sales data, Federal Open Market Committee Minutes, and Consumer Price Index inflation figures could spark substantive market reactions on any surprises.
Markets continue to speculate on whether the US Federal Reserve will soon move to reduce extensive monetary policy stimulus amidst encouraging signs for growth. Yet recent rhetoric from Fed Chairman Ben Bernanke made it clear the Federal Reserve has little intention to reduce extraordinary Quantitative Easing policies amidst sluggish employment growth. It will be interesting to watch whether Thursday’s Consumer Price Index figures will put pressure on the Fed to act on growing price pressures. If nothing else, any strong surprises to the topside would only increase discord and embolden the hawkish minority within the policy-setting FOMC.
The US Dollar seems to be at somewhat of a crossroads. After falling sharply into early-week trade, a substantive later reversal suggests that the beleaguered currency may have set an important low against the Euro and other counterparts. Whether or not said reversal comes to bear may very well depend on Sunday and Monday trading—setting the pace for the rest of the action-packed week of event risk.
Price gauges in the US, however, are likely to draw only passing interest this week, as it is generally accepted that spare capacity remains abundant. Moreover, the Fed is already acting to ensure that inflation does not fall too low, so any rise in headline inflation is likely to be viewed, at least in part, as a positive. Lloyds TSB look for a modest rise in the annual rates for both headline and core US CPI in January, albeit to just 1.7% and 1.0% respectively. The minutes of the January FOMC meeting, released on Wednesday, should underline that QE2 will progress according to plan. It is the employment data rather than inflation that will ultimately dictate how quickly and aggressively the Fed reverses its policy course. US activity data should draw more attention, headed by January retail sales (Tuesday). We look for a seventh consecutive monthly gain (+0.8%, ex autos +0.6%) as consumers respond to the improving economic backdrop and the recent fiscal boost. Fed manufacturing surveys from NY and Philadelphia are expected to show buoyant conditions in February, while we believe official data for January industrial production could trump expectations. Housing starts could also provide an upward surprise after falling to the lowest level since October.