forex trading

Forex traders will find significant event risk this week, as the Federal Reserve will announce their rate decision on Tuesday. Not to be ignored, inflation figures will be released from the UK, Euro-zone, and US, but the British pound will be particularly vulnerable to the minutes from the Bank of England’s most recent meeting and UK retail sales.

• UK Consumer Price Index – September 16
On Tuesday at 4:30 EDT, UK consumer price growth in August is expected to accelerate even faster to a 4.6 percent annual pace, which would mark the sharpest rise since May 1992. Inflation remains of great concern to the Bank of England, especially as the Bank’s Governor Mervyn King forecasts that CPI will rocket above 4 percent. However, the BOE has a dual mandate to maintain price stability and to promote sustainable growth and employment. The UK has already seen indications of a broad economic slowdown, but adding the fragile nature of the UK’s financial sector to the mix puts the Bank of England in a particularly precarious position, as a rate increase meant to fight inflation could easily push the UK into recession and trigger a severe credit crisis. As a result, the UK's MPC will likely continue to sound hawkish on inflation in order to contain consumer inflation expectations, but when it comes down to it, their bark may be bigger than their bite as the Bank of England is highly unlikely to actually raise rates, especially as overnight index swaps actually price in over 75bps worth of rate cuts within the next year. Nevertheless, very strong UK CPI figures could lead the British pound to rally upon release, while soft reading could weigh the currency down.

• US Consumer Price Index – September 16
The US headline consumer price index for the month of August is expected to go unchanged upon release at 8:30 EDT on Tuesday, while the annual rate of growth is forecasted to slip for the first time since April to 5.5 percent from 5.6 percent. On the other hand, the core CPI measure is anticipated to rise 0.2 percent to an annual rate of 2.6 percent, which would mark an 18-month high. If any of these figures surprise to the upside or downside, the markets will respond accordingly and the moves could be dramatic. On the other hand, if CPI is posted in line with expectations, US markets may prove unresponsive ahead of the Federal Reserve Rate decision at 14:15 EDT the same day.

• Federal Reserve Rate Decision – September 16
On Tuesday at 14:15 EDT, the Federal Open Market Committee (FOMC) is widely expected to leave rates at 2.00 percent, though as of Friday fed fund futures are pricing in a slight chance of a 25bp cut. However, the thing to watch will be the FOMC’s policy statement as a gauge of their bias going forward. The minutes from their August meeting said that “members generally anticipated that the next policy move would likely be a tightening,” but if this policy statement suggests that the Committee foresees an easing in price pressures – eliminating the need for tightening – the US dollar could fall significantly. Furthermore, there is potential for bearish comments on the financial markets given the bankruptcy of Lehman and sale of Merrill Lynch. On the other hand, persistently hawkish commentary could reignite the greenback’s rally.

• Bank of England September Meeting Minutes – September 17
The Bank of England’s meeting minutes tend to be a huge market-mover for the British pound, and this time is unlikely to be any different. During the August meeting, the minutes revealed that there was a 7-1-1 vote for the second consecutive month to leave rates at 5.00 percent, with one dissent in favor of a 25bp hike and one in favor of a 25bp cut. The vote this time around could easily be split again, as indicators of growth continue to deteriorate and inflation figures reflect persistent price pressures. However, given the substantial downside risks to growth, I think there’s some potential for additional Monetary Policy Committee members to have voted for a rate cut. Indeed, a 6-2-1 or 7-2 vote count could weigh heavily on the British pound on Wednesday morning, but if there is sufficiently hawkish rhetoric contained within the minutes and votes in favor of increasing rates, the UK currency could actually surge.

• UK Retail Sales – September 18
UK consumer spending is anticipated to have slowed in August, as retail sales are forecasted to fall 0.5 percent upon release at 4:30 EDT on Thursday, dragging the annual rate to a more than two year low of 1.6 percent. The latest BRC retail sales numbers support the case for such a move, as their measure of same-store sales plunged 1.0 percent in August from a year earlier. However, this is not the most reliable leading indicator: last month, the BRC’s figures reflected a 0.9 percent decline from a year earlier, while the UK government’s statistics showed a 0.8 percent monthly gain and a 2.1 percent annualized rise. That said, the Bank of England has said in the past that they may focus more on private surveys over government statistics, as the latter tends to be extremely volatile. As a result, traders should keep in mind that regardless of this upcoming number, the BOE likely still holds a bearish view of UK consumer spending.

Written by Terri Belkas,