UBS - "The search for inflation is becoming central to currency markets (...) In the week ahead, Canada, Australia and New Zealand all release their latest consumer price indices. The Bank of Canada also meets. We expect no change in policy but a weaker than consensus inflation print will increase expectations the BoC may cut its overnight rate from 1.00% later in the year. Australia's CPI release will also be closely followed after December's weaker than anticipated payrolls report. In addition, New Zealand's inflation data may push back market expectations that the Reserve Bank of New Zealand will start hiking rates when it meets at the end of this month.
Inflation concerns are also likely to keep affecting the major currencies too. The dollar will stay supported as the Federal Reserve tapers at each policy meeting. But concern that US inflation is too low will discourage Fed officials from signaling interest rate hikes are likely this year. Similarly, the ECB will keep highlighting its easing bias in the face of persistent low inflation - capping rallies in the single currency above 1.35 against the greenback. The Bank of Japan may increase its pace of quantitative easing if its next Economic Outlook Report in April shows inflation under-shooting its 2% target in 2015, and the Bank of England is likely to continue forecasting that rate hikes will not begin until next year now that UK inflation has fallen back to its 2% target for the first time in four years.
This week's key points for currencies are:
- Fed officials look through December's payrolls
- Eurozone PMI key in the week ahead for euro
- BoJ to keep policy unchanged but watch dissenters
- unemployment may hit threshold but BoE to stay dovish
- inflation data may pressure commodity currencies"
Mansoor Mohi-uddin, Managing Director & Head, Foreign Exchange Strategy at UBS Macro Research