How exactly is ECB going to tackle inflation? | 07 February 2014

Review of the past week

The last trading week of January was marked by consolidation of US dollar against the most part of its competitors. Core event of the week was Fed's meeting where FOMC members unanimously voted for continuation of QE-3 tapering. Besides, Ben Bernanke for whom it was the last chaired meeting stated that the economy will moderately grow and the recovery of labor market is expected to continue as well. Tapering of stimulative measures is negative for all risk assets.

On Friday 31, European preliminary inflation data was released. CPI was below expectations and is based on the level of 0.7% signifying that threat of deflation for the European economy is still vital. EUR/USD has been under pressure over the entire week and closed trades at the point of 1.3486.

Great Britain published GDP for the 4rd quarter of the previous year. The index is 0.7% and such value met expectations of market players. While speaking on Jan 29, BoE governor Mark Carney confirmed the regulator's unwillingness to raise interest rate within the nearest time, even if unemployment reaches target level. FOMC's decision to cut stimulative measures for 10 bln USD from Feb 1 was negative for British currency. Following to Fed's meeting, pressure on GBP/USD grew and trading week was closed on the level of 1.6438.

According to the last week's results, Japanese yen showed a symbolic growth in 0.2%. Positive stats on retails and inflation in Japan supported yen's quotations. Decline of Nikkei 225 stock index futures also played in bulls' hand. Nevertheless, we did not witness a significant consolidation of Japanese currency. A long-term ascending trend for USD/JPY is still in effect and one can see investors opening long positions after each strong decline. Trading week finished just above 102, on the point of 102.02.

Forecast for the week February 3 – 7:

Euro/US dollar:

This week is the first week of the month, which means that a lot of macroeconomic stats will be published. Core event for European region will be ECB's meeting on Thursday 6. Recent weak data on European CPI mark that threat of regional deflation is still high. In this regard, comments of Mario Drahgi will be very interesting. On the last week in Davos Drahgi stated that in case of inflation aggravation in Europe, ECB can departure from traditional form of quantitative easing.

On the last day of trading week, USA will release labor market report. This report is closely watched by entire financial world. Following to release of anticipating employment indicators from ISM in service field and ADP index, we can get an idea about Non-Farm data. Positive labor market report will contribute to USD strengthening against its European competitor. It will also confirm Fed's tapering policy which is in general positive for USD. During a week we can expect a moderately descending trend for EUR/ USD.

Pound/US dollar:

Markit Economics will release data on PMI for manufacture, construction and service within a week. On Thursday 6, Bank of England will have a meeting. Investors do not expect any changes from the British regulator. BoE governor Mark Carney more than once stated that interest rates will not be raised within the nearest time. Monetary policy will be stay for a rather long time which will restrain growth of GBP/USD. Decline of USD/GBP cross-rate will render a certain support to British currency along with US dollar.

A good deal of macroeconomic stats will be published in the USA this week and labor market report is the most important. In general, GBP/USD  is expected to develop a flat tendency within a week.

US Dollar/Yen:

On the 5th of February, Japan will publish report on salary level. Positive data will support demand in Japanese currency, because will contribute to increase in future expenses which will lead to aggravation of inflation process. Closure of long positions on stock markets will put a pressure on US Dollar/Yen quotations and we can see the price moves below 101. But one should not wait for Yen's strengthening. Long-term trend is ascending and decline of USD/JPY will provide bulls with an excellent chance for performance. In general, we can expect a flat tendency during a week.