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Week Ahead – US and UK Data to Lead Quiet Week as Dollar Can’t Make Up its Mind

After plenty of excitement from central banks and top-tier economic releases in the past couple of weeks, things will take a backseat over the next seven days. The slower news pulse could give way to some sideways action in currency markets as the US dollar fights off selling pressure. A more cautious mood on Wall Street could assist dollar bulls as stocks tend to perform poorly in May. There could be a further boost for the greenback coming in the form of the latest US CPI and retail sales numbers. The pound, meanwhile, which remained largely unruffled by the Bank of England’s decision to slow down QE, will be looking to UK GDP and Scottish elections results for direction.

The waiting game

The virus landscape around the world keeps changing continually, compelling a constant rethink by investors as the outlook brightens up in one part of the world but deteriorates rapidly in another. However, the central narrative that stimulus and vaccines will eventually pull the global economy out of the pandemic hole hasn’t changed. More importantly, most of the good news is priced in right now and although worrying virus headlines are only temporarily setting back risk appetite, there seems to be a clear lack of new drivers in the markets lately.

This was evident by the relatively modest lift to stocks by the string of record-busting earnings announcements on Wall Street this season. Bond markets have also been fairly steady as the Federal Reserve has repeatedly stressed that now is not the time to talk about tapering. Eurozone bond yields have stood out, however, climbing to fresh highs. But this could be interpreted as a bit of catch-up and euro/dollar dynamics haven’t altered considerably.

The big question now is, are traders simply standing by, waiting for the next major trigger to rekindle the risk rally, or are they biding their time until the Fed signals its first tapering move?

Inflation and retail sales to be eyed in America

US data certainly suggests it’s only a matter of time before the Fed finds itself in a spot where it can no longer justify its colossal monthly pace of $120 billion in bond purchases. Next week’s indicators are likely to further raise question marks about the Fed’s ultra-dovish stance. The consumer price index is out on Wednesday and expectations are that the 12-month rate jumped by one percentage point to 3.6% in April. The increase in the core rate is anticipated to have been more moderate, from 1.6% to 2.6%.

Policymakers are for the time being ignoring this surge as much of the rise in annual inflation is down to the low base effect of 2020 when prices slumped at the onset of the pandemic. However, if price pressures don’t begin to ease in a few months’ time, the response from both policymakers and investors alike won’t be quite as muted.

Producer prices will follow on Thursday before a final flurry of data rounds up the week on Friday, consisting of retail sales, industrial production and the University of Michigan’s preliminary consumer sentiment survey.

Retail sales soared by almost 10% on a monthly basis in March as American consumers were handed an extra $1,400 in pocket money. However, the stimulus boost is already expected to have faded in April and retail sales are projected to have grown just 0.2% m/m. Industrial production is forecast to have increased for the second straight month, while the University of Michigan’s consumer sentiment gauge probably rose to a fresh one-year high in May.

If the data are broadly stronger than expected, particularly the inflation and retail sales figures, Treasury yields might receive a nudge up, having drifted lower over the past 10 days. This could bolster the dollar index above major resistance in the 91.40 region. However, if the incoming numbers don’t bring anything new to the picture, more consolidation could be in order.

Will ECB minutes stir things up for the euro?

A sideways market would make it difficult for the euro to resume its uptrend in the near term, though it could also shore it up above the $1.20 level. There’s not much on the European agenda next week that could be a game changer for the single currency. The only notable releases are the ZEW economic sentiment index out of Germany on Tuesday, and the final Eurozone CPI prints for April along with the industrial production figures for the bloc on Wednesday.

However, the European Central Bank’s latest meeting minutes could invite some volatility on Friday. The ECB eased concerns at the April policy meeting that