US Dollar, Euro at Risk Ahead of Speech by Fed's Bernanke, ECB Rate Cut

The euro, US dollar, and Japanese yen face hefty event risk next week as the European Central Bank is anticipated to cut interest rates and Federal Reserve Chairman Ben Bernanke is scheduled to speak on the financial crisis and policy response. Based on past experience, comments by central bank chiefs tend to be some of the biggest market-movers out there, which should keep forex, stock, and fixed income traders on their toes.

Federal Reserve Chairman Bernanke Speaks on Crisis, Policy Response - January 13

Federal Reserve Chairman Ben Bernanke is scheduled to speak in London at 08:00 ET on the financial crisis and policy response, and this could prove to be one of the biggest market-movers of the week due to its potential impact on risk sentiment. If Chairman Bernanke is bearish on prospects for the financial markets and global economy, his comments could have very negative repercussions for the stock markets, and we could see flight-to-quality spark demand for Treasuries, the US dollar, and Japanese yen. On the other hand, if he announces a new type of policy action or if he manages to inspire confidence that conditions will not get significantly worse, risky assets could rally.

US Advance Retail Sales (DEC) - January 14

No surprises here: the Commerce Department is forecasted to report that US retail sales fell negative for the sixth straight month in December. This is particularly negative because the holiday shopping season is supposed to be a boon for retailers, but even the most aggressive discounting wasn't able to offset the impact of a deteriorating labor market, tighter credit conditions, and a year-long recession. More specifically, advance retail sales are anticipated to have contracted 1.2 percent during the month, and excluding auto sales are expected to have slumped 1.3 percent. We've already heard disappointing results from a variety of sources, including Mastercard's SpendingPulse survey, which showed that holiday spending tumbled 4 percent in December from a year earlier (excluding gasoline). As a result, another contraction in advance retail sales is likely, and these may mark a rather consistent trend through the first half of 2009 as well. As we saw with US non-farm payrolls, the impact of a disappointing result may be limited, as the Federal Reserve has already cut the fed funds target to a record low range of 0.0 percent - 0.25 percent and has no room to cut further.

Australian Employment Change (DEC) - January 14

The Australian labor markets have tightened substantially over the past few years, as the unemployment rate dropped to multi-decade lows of 3.9 percent in February. However, after the Reserve Bank of Australia left interest rates at a 16-year high of 7.25 percent for much of 2008, the labor markets have shown signs of deterioration, along with domestic demand in general. While the RBA has since cut rates by 300 basis points to 4.25 percent, and will likely continue to cut rates through the end of the year, the Australian unemployment rate is anticipated to pick up to 4.5 percent from 4.4 percent while the net employment change is forecasted to fall negative for the second straight month by 20,000. The latter report tends to have a greater impact on the Aussie since the figure rarely meets expectations and can lead to volatile short-term price action for the Australian dollar immediately following the news at 19:30 EDT.

European Central Bank Rate Decision - January 15

The decline in Euro-zone CPI estimates below the European Central Bank's 2.0 percent target, steady increases in unemployment, and increasingly pessimistic consumer and business confidence all suggest that the central bank will do as the market's expect: cut interest rates by 50 basis points to 2.00 percent to match the 2005 record low. This easily leaves the 7:45 ET announcement as one of the most important pieces of event risk this week, but traders will also have to look out for comments by ECB President Jean-Claude Trichet during his post-meeting press conference at 8:30 ET. Mr. Trichet is one of the most opinionated central bank chiefs around, and suggestions that the ECB will continue to cut rates have the potential to lead the euro far lower. On the other hand, if the ECB goes the route of the BOE and signals that they may leave rates unchanged during their next meeting, the currency could actually rally.

US Consumer Price Index (DEC) - January 16

The release of the December reading of the US Consumer Price Index (CPI) could lead the term “deflation” to be used abundantly in coming weeks and months (one that became very popular in November, according to Google Trends). Indeed, CPI is forecasted to have plunged 0.9 percent during December while the annual rate is anticipated to have fallen negative for the first time since 1955 by 0.1 percent. Excluding volatile food and energy prices, though, core CPI may have risen a slight 0.1 percent during the month, leaving the annual rate to edge down to a more than 4-year low of 1.9 percent from 2.0 percent. Overall, the news could weigh on the US dollar if CPI does indeed fall negative.

DailyFX

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