Policy makers feel the pressure of global disinflation

Last week’s US jobless claims rose to 339,000, a much higher reading than what was forecast, while January retail sales dropped 0.4% against an expected flat reading. Some commentators have attributed these surprising figures to the poor weather conditions, but even so this was still disappointing data. US Federal Reserve Chairwoman, Janet Yellen, said last Wednesday she has sufficient confidence in the economic recovery and that the central bank will continue its programme of tapering asset purchases at future meetings if the economy continues to improve. The lower-than-expected data which was released later in the week however may now be weighing heavily on her decision making. The EUR/USD rose to its highest level in two weeks last Thursday, hitting 1.3691 before dropping back to around 1.3680. Traders are now eagerly looking to the release of the FOMC minutes on Wednesday for indications as to how the 10 voting policymakers came to their decision to maintain the current pace of tapering for the asset buying program.

Attention is also turning to Thursday’s release of the US Consumer Price Index, a key indicator to measure inflation and purchasing trends. Estimates point towards the year on year CPI figure remaining at 1.5%, with the monthly figure falling to 0.1% from 0.3%. Should the inflation rate threaten to move even lower, it is possible Yellen will need to consider adjusting monetary policy to stave off the threat of deflation. The EUR/USD pivot point is 1.3651, with resistance levels at 1.3717, 1.3758 and 1.3824; the support levels are 1.3610, 1.3544 and 1.3503.

Inflation is also a big focus for the European Central Bank, with ECB President Mario Draghi signaling he may act as early as next month to counter low inflation. Eurozone inflation is currently sitting at 0.7% – less than half the target of 2%. While Draghi remains under pressure, he did keep interest rates unchanged at a record low in February. Analysts are now assuming that Draghi is looking past short-term inflation developments with the longer term goal of improving economic growth in the Eurozone. Likewise, in the February Monthly Report released last week policy makers indicated their belief that inflation in the Eurozone should remain low for a prolonged period of time, before it gradually climbs towards the 2% target level.

Tuesday’s release of the ZEW Survey measuring institutional investor sentiment will be closely watched for insight into the health of both the German and Eurozone economies. The German number is expected to remain static at 61.7, while growth is expected in the Eurozone figure from 73.3 to 73.9, reflecting significant progress made in the region’s economic recovery.

The British economy is continuing to gradually recover with the latest house price data bringing further evidence of strength. Last week’s release of the Quarterly Inflation Report gave market participants some insight into Bank of England Governor Mark Carney’s monetary policy strategy, albeit his comments baffled many commentators. Carney’s dovish tone indicated he was moving away from the previously issued forward guidance linking interest rates to unemployment. In future, the Bank’s Monetary Policy Committee has pledged to provide more information on its thinking on interest rates without giving precise forecasts.

The British pound strengthened on the release of the inflation report with EUR/GBP slumping to a nine-day low. Attention is now turning to Tuesday’s Consumer Price Index and Thursday’s jobs data announcements – whilst Carney has removed the direct link between the unemployment rate and monetary policy, there is certainly going to be a connection between the health of the jobs market and monetary policy going forward. The GBP/USD pivot point is 1.6643, with resistance levels at 1.6686, 1.6716 and 1.6759 and support levels at 1.6613, 1.6570 and 1.6540. The EUR/GBP pivot point is at 0.8206, with resistance levels at 0.8232, 0.8253 and 0.8279 and supports at 0.8185, 0.8159 and 0.8138.

Japan has started the week on a disappointing note with the fourth quarter 2013 GDP figure coming in 0.3% higher than the previous month, but well short of the forecast 0.7%. The main culprit attributed to this disappointing data is weak export growth of only 0.4%. The scene was set for exporters to take advantage of the weak yen, but this has not translated into results. Instead, GDP has been boosted by a surge in imports and strong retail domestic spending. The latter is likely to wane substantially as a 3.0% increase in sales tax comes into effect in April. The USD/JPY pivot point is 102.14, with resistance levels at 102.58, 102.97 and 103.41 and supports at 101.75, 101.31 and 100.91.