FED to stay put, inflation and BOE Minutes to take center stage

A quiet fundamental week comes to an end, with little to remark from that side except maybe for Thursday BOE’s Carney surprise statement the Central Bank may hike rates sooner than expected. Next week however, will be far more interesting with FED meeting, BOE Minutes, and inflation readings in Europe, the US and the UK, all of them expected to bring action to a lazy market. 

Starting with the FED, early this week some rumors surged the US Central Bank may accelerate the pace of tapering, cutting $15B instead of the usual $10B based on the idea that stocks stand at record highs, and therefore the impact won’t be that negative, and that unemployment rate in the US stands at 6.3% almost a six year low. But beyond that there are no reasons to believe the FED will change course this month, and another $10B cut is expected, bringing QE down to $35B a month. Weaker than expected retail sales support the case of a no change in the economic policy, and Yellen’s idea that despite tapering interest rates will remain low because of the fragile economic outlook.  Anyway, if the FED decides to increase the amount trimmed, market will tend to price in a sooner than later rate hike, which at the end may result in a dollar rally. A $10B cut on the other hand will be no surprise and therefore, have little effect across the board. 

What seems it’s going to be THE event of the week will be BOE Minutes, considering Carney’s wording last Thursday: Minutes are a resume of what has been discussed early month in the economic policy meeting, with a detail on how the 9 members voted latest policy. Up to last month, it has been a steady 0-0-9, standing for 0 votes for a rate cut, 0 votes for a rate hike, and 9 votes to keep policy unchanged. It will take just one tiny change on it to trigger more gains in Pound, expected then to soar beyond 1.70 against the greenback. Inflation readings in the UK will be released a day before, and are expected to remain unchanged at 1.8% yearly basis. If however the number is above expected, market will have another reason to price in a sooner rake hike, and the GBP will likely be the star performer of the week. Weak inflation along with no changes in the voting, will be highly disappointing, and probably send Pound back down across the board.

Finally, US inflation readings are expected to move the markets on Tuesday and the Federal Reserve's preferred measure of inflation—the price of consumer spending excluding food and energy— stands at 1.8% and is expected to remain so. FED officers had been quite confident inflation will remain well below the 2% target for “quite long” but afore mentioned reading had increased since February at a 2.1% seasonally adjusted annual rate, meaning inflation may be rising at a quite faster pace than desired. A higher inflation is usually understood by markets as a growing possibility of a rate hike, and despite the FED has suggested they won’t be moving rates anytime soon, a steady rise above 2% will result in speculation over a sooner than later rate hike and therefore boost the dollar.