FX Week Ahead: US Inflation; BOC & ECB Rate Decisions; UK GDP; Canada Jobs

03/10 WEDNESDAY | 13:30 GMT | USD INFLATION RATE (CPI) (FEB)

The February US inflation (CPI) report will be released this coming Wednesday as market measures of inflation have jumped higher since the start of the year. At the close of this week, the 5y5y inflation swap forward is at 2.328%, down from its yearly high of 2.481% set on February 8, and the 5y5y breakeven is 2.065%, off of its yearly high of 2.215% set as well on February 8.

Looking to the data due, according to a Bloomberg News survey, stabilization in price pressures is anticipated, if not showing some upside pressure starting to build. The headline inflation rate due in unchanged at +1.4% (y/y), while core inflation is due in at +1.7% from +1.4% (y/y). Over the coming months, we’ll learn how resilient of a position the Fed has staked out, as the likely impact of a base effect could drive headline inflation higher through +2% over the coming months.

IG CLIENT SENTIMENT INDEX: USD/JPY RATE FORECAST (MARCH 5, 2021) (CHART 1)

FX Week Ahead - Top 5 Events: US Inflation; BOC & ECB Rate Decisions; UK GDP; Canada Jobs

USD/JPY: Retail trader data shows 41.15% of traders are net-long with the ratio of traders short to long at 1.43 to 1. The number of traders net-long is 9.75% lower than yesterday and 16.97% lower from last week, while the number of traders net-short is 1.89% higher than yesterday and 42.55% 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.

03/10 WEDNESDAY | 15:00 GMT | CAD BANK OF CANADA RATE DECISION

The BOC meets for the second time this year this coming Wednesday, and in the interim period, the Canadian Dollar has been mostly rangebound. At the January meeting, BOC Governor Tiff Macklem noted that “we’ve seen this broad-based US dollar deprecation that doesn’t reflect some positive development in Canada that the exchange rate is absorbing…the exchange rate is starting to create a material headwind for the Canadian economy.”

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