FX Week Ahead – Top 5 Events: Chinese, German, US Inflation Rates; Banxico Rate Decision; US Retail Sales

FX Week Ahead Overview:

  • The second week of May sees a global focus in the first half and a North American focus in the second half.
  • US economic data due in the second half of the week doesn’t appear that it will change the hearts and minds of traders after the disappointing April US jobs report.
  • Overall, recent changes in retail trader positioning suggest that the US Dollar has a mixed bias.

For the full week ahead, please visit the DailyFX Economic Calendar.

05/11 TUESDAY | 01:30 GMT | CNY Inflation Rate (APR)

With respect to any inflation figures anywhere, it’s been widely anticipated that a significant base effect would be making its way through data series over the coming months. China is not excluded from this expectation. Accordingly, the People’s Bank of China may thus look through any spike in the inflation figures that would, in an otherwise normal environment, suggest that a reduction in monetary support might be considered. Due in at +1% from +0.4% (y/y), the headline April Chinese inflation reading may not influence Yuan rates, one way or the other.

Read more: Chinese Yuan Technical Analysis: EUR/CNH, USD/CNH Rates Outlook

05/12 WEDNESDAY | 06:00 GMT | EUR German Inflation Rate (APR)

Germany is Europe’s largest economy, which biases the European Central Bank to be a bit more sensitive to changes in German economic data than most other countries. And with the headline German inflation rate due in at +2% from +1.7% (y/y) for April, it may be the case that ECB policymakers are noticing that the hallowed base effect is coming into play.

If so, further acceleration in headline German (and Eurozone) inflation rates is expected over the coming months, which may otherwise give ECB policymakers a bit more hesitancy with respect to cutting interest rates, even at the margins.

IG CLIENT SENTIMENT INDEX: EUR/USD RATE FORECAST (MAY 10, 2021) (CHART 1)

FX Week Ahead - Top 5 Events: Chinese, German, US Inflation Rates; Banxico Rate Decision; US Retail Sales

EUR/USD: Retail trader data shows 32.06% of traders are net-long with the ratio of traders short to long at 2.12 to 1. The number of traders net-long is 24.01% higher than yesterday and 18.41% lower from last week, while the number of traders net-short is 8.87% higher than yesterday and 14.61% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD prices may continue to rise.

Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/USD trading bias.

05/12 WEDNESDAY | 12:30 GMT | USD Inflation Rate (APR)

According to a Bloomberg News survey, further upside in price pressures is anticipated with the headline inflation rate due in at +3.6% from +2.6% (y/y) in March, while core inflation is due in at +2.3% from +1.6%. Largely anticipated by Federal Reserve policymakers, accelerating price pressuresstill may not do much to move the needle for the FOMC in the wake of the April US non-farm payrolls report. It remains the case that there will be a base effect could keep headline inflation higher +2% over the coming months.

IG CLIENT SENTIMENT INDEX: USD/JPY RATE FORECAST (MAY 10, 2021) (CHART 2)

FX Week Ahead - Top 5 Events: Chinese, German, US Inflation Rates; Banxico Rate Decision; US Retail Sales

USD/JPY: Retail trader data shows 47.12% of traders are net-long with the ratio of traders short to long at 1.12 to 1. The number of traders net-long is 2.54% higher than yesterday and 4.47% lower from last week, while the number of traders net-short is 21.61% higher than yesterday and 11.93% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/JPY prices may continue to rise.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/JPY-bullish contrarian trading bias.

05/13 THURSDAY | 18:00 GMT | MXN Banxico Rate Decision

At the end of 2020, Mexican President Andres Manual Lopez Obrador nominated Galia Borja Gomez, the Treasurer of the Mexican Finance Ministry, to join Banxico as deputy governor, setting the otherwise historically hawkish central bank on a more dovish policy path. True to its new form, Banxico has seen its main rate drop to 4% in recent months.

But now that inflation pressures are rising in excess of the +2-4% target band (the April reading was north of +6% (y/y)), Banxico may be prevented from exuding a dovish bias henceforth. The Mexican Peso may see its appeal increase post-rate decision this week.

05/14 FRIDAY | 12:30 GMT | USD Retail Sales (APR)

Consumption is the most important part of the US economy, generating around 70% of the headline GDP figure. The best monthly insight we have into consumption trends in the US might arguably be the ‘retail sales advance’ report.

According to a Bloomberg News survey, a sharp pullback in activity is anticipated after the surge thanks to the Biden stimulus checks. Just like in February, the month after the surge thanks to the Trump stimulus checks, US consumers appear to have throttled back spending in April.

Headline US retail sales is expected to have grown by only +0.2% (m/m) from the gain of +9.8% (m/m) in March. Given the context of the US Dollar following the April US non-farm payrolls report, it may be the case that a disappointing April US retail sales report further undercuts the greenback.

Atlanta Fed GDPNow 2Q’21 Growth Estimate (May 7, 2021) (Chart 3)

FX Week Ahead - Top 5 Events: Chinese, German, US Inflation Rates; Banxico Rate Decision; US Retail Sales

Based on the data received thus far about 2Q’21, the Atlanta Fed GDPNow forecast is looking for growth at +11% annualized. But the estimate has fallen in recent weeks, from a peak of +13.6% on May 4. The Blue Chip estimate has been more tame, projecting annualized growth closer to a 9% rate. The next 2Q’21 Atlanta Fed GDPNow forecast will be released on Friday, May 14.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

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