Australian and US Inflation Under Spotlight This Week

After a quiet Monday, news flow should begin to pick up with the release of US and Australian CPI, as well as European and Chinese PMI data. Markets are still reeling after the shock downing of Malaysian Airways flight 17 last week, however given a lack of escalation over the weekend markets are currently retracing risk-off moves – the Ruble has halted its slide after falling dramatically last week.

RBA governor Glenn Stevens speaks at the Anika Foundation tomorrow, followed by quarterly Australian CPI on Wednesday – the CPI data will be followed closely. With little clear direction on interest rates due to subdued economy contrasted with strongly rising house prices, inflation data will help swing sentiment either way. Given the AUD’s persistent rise since the start of the year, the exchange rate may provide deflationary pressure. Analysts are expecting a quarterly inflation rate of 0.5%, slightly down from 0.6% last quarter.

US Core CPI will be the news feature of Tuesday night. Some market participants have begun to expect rate increases early into next year, and hawkish FOMC members are expecting rates to begin rising in 2015 – the hawks will be keen to see some confirmation in the inflation data. Interest rate rises have been expected from early on in recovery from the GFC, however expectations have been continually revised downwards towards zero as the reality of a sluggish economy meaning that inflationary pressures have been weak.

However, with US unemployment trending lower towards normal levels the economy may be entering an environment where wage cost pressures begin to gain traction. With tapering of QE all but set in stone, the focus has come to rest on the Fed Funds Rate, or more specifically a combination of the Fed Funds Rate, Interest on Excess Reserves and the Fed’s new Overnight Reverse Repurchase Facility – all will be used to set a band for short term interest rates when the Fed finally tightens policy.

The Pound will face volatility this week as traders look towards the MPC Bank Rate Votes and Mark Carney’s speech later that day. Like last month, there is not yet an analyst forecast for dissent from keeping rates on hold at 0.50% – but with inflation data ticking up and house prices showing dramatic increases, this unanimous voting is unlikely to hold indefinitely. The votes come ahead of the Preliminary GDP figure to be released on Friday.

Source: Forex Market Review – Australian and US Inflation