FX Drivers: The Week Ahead

The Bank of Japan, the Eurogroup and the G20 meetings -- coupled with the main gauges of economic activity and growth in Japan and in the euro zone -- will fill the week ahead with important drivers that will steer the future trend direction of the yen and euro.

In preparation for the new trading week, here's the outlook for the Top 10 spotlight economic events that will move the markets around the globe.

1. EUR: Eurogroup Meeting, Mon., Feb. 11, all day event.
As finance ministers from the euro-zone meet, the main topic of discussion will be the bailout for Cyprus after the troubled nation formally applied for assistance. With allegations of money laundering and other issues in Cyprus complicating the process, the event could raise uncertainty levels and could weigh on the euro if the Eurogroup is not able to reach an agreement on the terms of the financial aid or delays its decision until a later date.

2. GBP: U.K. CPI, the main measure of inflation preferred by the Bank of England, Tues., Feb. 12, 4:30 am, ET.

Inflationary pressures in the U.K. are forecast to remain at 2.7% y/y in January, same as the 2.7% y/y reading in the previous month. As the threat of a triple-dip recession looms in the U.K., inflation will not be an obstacle if the Bank of England finds it necessary to ease monetary policy further in upcoming months.

3. EUR: Euro Zone Industrial Production, the main gauge of industrial activity measuring the output of factories, mines and utilities, Wed., Feb. 13, 5:00 am, ET.

Following last week’s better than expected factory orders and industrial production reports from Germany, we could see a stronger reading from the euro-area data. Industrial production is forecast to rise by 0.2% m/m in December from the 0.3% m/m drop in November.

4. GBP: Bank of England Inflation Report, the central bank’s official analysis and outlook on inflation and the economy, Wed., Feb. 13, 5:30 am, ET.

Reaching record high levels last year, inflation in the U.K. has subsided. However, economists warn that this was likely as a result of slowing economic activity. If the Bank of England expects this trend to continue and expresses concerns about a potential triple-dip recession, the report will raise the odds that the central bank may resort to additional monetary policy easing. The GBP will stay under pressure if the market continues to price expectations of more QE and possibly even a rate cut that might come in the not too distant future.

5. USD: U.S. Retail Sales, an important gauge of consumer spending measuring sales at retail establishments, Wed., Feb. 13, 8:30 am, ET.

Consumer spending in the U.S. is expected to inch a bit lower with retail sales registering a smaller increase by 0.3% m/m in January after rising by 0.5% m/m in December.

6. JPY: Japan GDP, the main measure of economic activity and growth, Wed., Feb. 13, 6:50 pm, ET.

The world’s third-largest economy contracted by 0.9% q/q in the third quarter of 2012 but is expected to return back to growth by 0.1% q/q in Q4. Despite of the upbeat forecast, there will be a significant event risk if the report disappoints and shows the Japanese economy contracting for another consecutive quarter. A recession in Japan will mean that the government and the Bank of Japan could step up their efforts to devalue the currency and to stimulate the economy, keeping the trend of yen weakness intact.

7. JPY: Bank of Japan Interest Rate Announcement, Thurs., Feb. 14, around 12:00 am, ET.

It will not be surprising to see the Bank of Japan continuing full speed ahead with their open-ended QE program until the new 2% inflation target is in sight, as promised at the last meeting. If the Bank of Japan does not surprise the markets with something that they don’t already know, traders could see an opportunity to unwind short yen positions ahead of the weekend’s G20 meeting.

8. EUR: Euro Zone GDP, the main measure of economic activity and growth, Thurs., Feb. 14, 5:00 am, ET.

With the German economy unexpectedly contracting in the final quarter of last year, there will be no support from the region’s largest economy that could boost the overall GDP reading from the euro area. As a result, the double-dip recession in the euro zone is forecast to continue for a third consecutive quarter with the economy contracting by 0.4% q/q in Q4 2012 following the 0.1% q/q contraction in the third quarter. The report should weigh on the euro as it reminds the markets that, despite of the optimistic statements made by euro-area leaders about the prospects of a future recovery, the current reality is that the euro zone is in recession and there is a chronic contraction in its manufacturing and services sectors.

9. USD: U.S. Consumer Sentiment, the University of Michigan's monthly survey of 500 households on their financial conditions and outlook of the economy, Fri., Feb. 15, 9:55 am, ET.

After last month’s upward revision, the outlook of U.S. consumers is forecast to stay optimistic with a preliminary sentiment index reading of 74.6 in February, compared with 73.8 in January.

10. JPY: G20 Meeting, Fri., Feb. 15, and Sat., Feb. 16, two-day event.

Finance ministers and central bankers from the 20 most-developed industrialized nations in the world will gather in Moscow as traders pay close attention to any statements or agreements that could be made during the G20 meeting on the issues of “currency wars” and currency devaluation. With the yen depreciating rapidly in recent months due to the aggressive measures taken by the Japanese government and the Bank of Japan, it would interesting to see if the efforts of Japanese officials to weaken their currency and to spur economic growth will be criticized by their G20 colleagues.