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Week Ahead: Inflation fears to rip through FX markets?

Week Ahead: Inflation fears to rip through FX markets?

Inflation is coursing through the global economy, and central bankers around the world are raising rates in a bid to stamp out these scorching consumer prices.

Market participants are growing increasingly fearful of the economic scenarios that lie ahead, ranging from stagflation to a recession, prompting selloffs across various asset classes, from bonds to stocks.

With inflation all the rage, the incoming US consumer price index is set to grab the market spotlight, amid these scheduled economic data releases and events in the coming week:

Monday, May 9

  • CNH: China April external trade
  • JPY: Bank of Japan releases March meeting minutes
  • RUB: Russian President Vladimir Putin set to speak at Victory Day military parade

Tuesday, May 10

  • AUD: Australia weekly consumer confidence, April household spending and business confidence, 1Q retail sales
  • EUR: Germany May ZEW survey expectations
  • USD: Fed speak – Cleveland Fed President Loretta Mester, Atlanta Fed President Raphael Bostic, New York Fed President John Williams, Fed Governor Christopher Waller, Minneapolis Fed President Neel Kashkari

Wednesday, May 11

  • AUD: Australia May consumer confidence
  • CNH: China April CPI, PPI, and FDI
  • USD: US April CPI (consumer price index), Atlanta Fed President Raphael Bostic speech
  • US crude: EIA weekly US crude inventories
  • Disney Q1 earnings (after US markets close)

Thursday, May 12

  • AUD: Australia May consumer inflation expectations
  • GBP: UK March and Q1 GDP, March industrial production
  • USD: US weekly initial jobless claims, San Francisco Fed President Mary Daly speech

Friday, May 13

  • EUR: Eurozone March industrial production
  • USD: US May consumer sentiment

 

It’s still very much a dollar-centric focus in FX markets at present.

Despite the Fed’s relatively dovish message this week, the benchmark dollar index is still treading water around a 20-year high, tantalizingly close to the psychologically-important 104 line.

READ MORE: 3 reasons why the US dollar is climbing?

 

Here are two major factors that may help DXY breach 104:

  1. US inflation: The April consumer price index comes in higher than the market-expected 8.1% figure, and also above the 8.5% print in March. 

    Further signs that inflationary pressures are not abating and could threaten the US economy may prompt the Fed into a more aggressive stance and potentially reconsider a 75 basis point hike sometime this summer.  

    Such a narrative should spell more upside for the greenback, either by way of Treasury yields extending their ascent in expectation of more Fed rate hikes, or by way of heightened demand for safe havens as the prospects of an inflation-induced recession rise.

     
  2. Fed speak: Fresh from the latest FOMC meeting, officials from the US central bank are set to make public speeches in the week ahead, potentially offering more clues about the Fed’s next moves.

    If these Fed officials offer a narrative counter to Chair Powell’s relatively dovish message, that could reinvigorate dollar bulls and reignite the rocket boosters under DXY.

 

The surging greenback would leave the rest of the FX universe at the mercy of King Dollar, as the equally-weighted USD Index looks to retest the June 2020 resistance around 1.17560.

 

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