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FX Week Ahead: Inflation Theme Stands Out

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Investors will be looking to the monthly inflation reports from across the key economies. In particular, the U.S and the UK’s inflation reports will be under focus as consumer prices stand close to the respective central bank’s target rates. The Eurozone takes a step back as the Fed’s Yellen gives her semi-annual testimony to the U.S. Congress and the UK will be reporting the inflation and jobs figures this week. The Swedish Riksbank is on the tap this week, but no changes are expected in interest rates. Here’s a quick run down of this week’s important events.

UK Inflation set to inch closer to BoE’s 2% target

All eyes will be in the UK this week as the monthly inflation figures will be due on Tuesday. Economists are expecting to see headline inflation accelerate 1.9%, up from 1.6% previously. Last week, BoE member Kristin Forbes spoke about the need for hiking rates as inflation continues to rise steadily. However, the central bank could be seen staying on the sidelines until the end of March. Still, a beat on the estimates will be bullish for the British pound.

UK Consumer price index 1.6%, December 2016
UK Consumer price index 1.6%, December 2016

Following the inflation report on Tuesday, the monthly jobs report is due on Wednesday. Average earnings, including bonuses, are expected to rise 2.8%, rising at the same pace as before while the UK’s unemployment rate is expected to remain steady at 4.8%, which would mark a fourth consecutive month of the unemployment rate staying steady.

Yellen’s semi-annual testimony

Federal Reserve Chair Janet Yellen will be testifying to the House Financial Services Committee on the U.S. economy and monetary policy on February 14 and 15. The semi-annual hearing will begin at 10 a.m., and Ms. Yellen will be quizzed on a number of issues, starting with the central bank’s views on the U.S. economy and eventually shifting to the topic of interest rates.

Yellen’s testimony comes at a time when the markets once again diverge from the Fed’s projections. The central bank expects to hike interest rates three times this year, but the markets are projecting only two rate hikes. Furthermore, with the Fed seen not giving any signals on the March rate hike, the prospects for three rate hikes are slowly diminishing.

The U.S. jobs report while robust is yet to send convincing signals of wage hike pressures and the resulting inflation. So far, Fed members have been vague and have spoken on the broader economic outlook, but did not give out much in terms of the next rate hike.

Besides Yellen’s speech, economic data from the U.S. will include inflation figures for the month of January with the headline CPI expected to rise 2.4%, accelerating from a 2.1 % increase registered in December 2016. Retail sales are expected to show a 0.4% increase on a monthly basis, excluding autos while headline retail sales are expected to rise just 0.1%, down from 0.6% previously.

Riksbank to keep monetary policy unchanged

The Riksbank’s monetary policy meeting is scheduled for February 15th when the central bank is expected to announce its monetary policy. Following the decision in December to expand the asset purchases by an additional 30 billion SEK in bonds by mid-2017 on top of the existing 245 billion that was already purchased in 2016, the central bank is seen sitting on its hands at this week’s meeting.

In January, the central bank’s minutes revealed that there were some dissenting votes on the decision to expand the asset purchases and signaling a rate cut and the deciding vote was cast by the central bank governor, Ingves to expand the bond purchases. Considering that the central bank took the decision just two months ago, the meeting this week is unlikely to see any major decisions being taken as the central bank will wait for fresh inflation reports coming out later in the week.

Sweden Inflation: 1.7%, December 2016
Sweden Inflation: 1.7%, December 2016

Inflation in Sweden rose to the highest level in nearly 5-years in December as consumer prices accelerated from 1.4% previously to 1.7% in December. The next inflation report for January will be coming out on 17th February, and consensus estimates are for a pullback from December 1.7% increase to show a 1.5% increase in January.

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