With Chinese New Year and a lack of new data releases, last week turned into a bit of a non-event for currency markets. But with the exception of today (where the only thing of interest is the meeting of European finance ministers’) the rest of the week will very busy, especially for the Pound. On Tuesday, figures will reveal just how far from the Bank of England target inflation actually is. This is the first month that will include the recent VAT rise, with CPI expected to hit 4% and RPI (which I think is a better gauge of the inflation rate experienced by you and me) through 5%. Up till now, for a great many people, it has difficult to distinguish between 2 or 3 per cent inflation. In my opinion, a 5% rate is psychologically important and will push the BoE into action much sooner than people expect. The bank minutes are due for release next week, which will show how many members voted for a rise this time around, but on Wednesday the quarterly inflation report will detail their outlook for inflation over the coming months. The key point will be if the Bank thinks that current inflation levels are temporary (their current thinking) or that it is more permanent in nature and we will probably be able to guess the voting preferences from the report.
Also this week we see unemployment figures and jobless claims on Tuesday and retail sales, a measure of the health of the high street, on Friday. Positive sales data and no change for unemployment should be positive for Sterling, but we are very dependent of the content and tone of Wednesdays report. Elsewhere, US retail sales are also out on Tuesday and are expected to show a moderate increase with US CPI data, in contrast to Britain, forecast for 1.6%. The Dollar pushed higher over the weekend after University of Michigan consumer sentiment data moved to eight month highs and until the data flood gates open tomorrow we do not expect any large reversals of this trend.
Once again rising bond yields in periphery nations has started to drag down the Euro. As politicians continue to disagree about debt reduction targets and the enlargement of the EFSF, the merry-go-round may begin to focus again on Europe and this will probably manifest its self in a weaker Euro. Data wise we are pretty light on the ground, with only German GDP and Eurozone industrial production of note later in the week.