FX Awaits Data, FOMC by Korman Tam

At 4:30 AM UK August CPI m/m (exp 0.4%, prev -0.6%)
UK August CPI y/y (exp 1.9%, prev 1.9%)
UK August RPI m/m (exp 0.4%, prev -0.6%)
UK August RPI y/y (exp 4.0%, prev 3.8%)
UK August RPI-x m/m (exp 0.3%, prev -0.6%)
At 5:00 AM Germany September ZEW Current Conditions (exp 75.0, prev 80.2)
Germany September ZEW index (exp -15.5, prev -6.9)
At 8:30 AM US August core PPI m/m (exp 0.1%, prev 0.1%)
At 9:00 AM US July TICS (exp $85.0 bln, prev $120.9 bln)
At 1:00 PM US September NAHB (exp 20.0, prev 22.0)
At 2:15 PM FOMC Policy Decision (exp 5.00%, prev 5.25%)

The major currency pairs will likely remain locked in range ahead of Tuesday’s highly anticipated FOMC monetary policy announcement, slated for 2:15 PM. Although the Fed meeting will garner the lion’s share of market attention, there will also be several key data releases that should impact central bank monetary policy decisions, namely the Bank of England and the European Central Bank.

The data include inflationary reports from the UK, consisting of the consumer price index and retail price index and from the Eurozone, the Germany ZEW sentiment survey. The ECB is expected to lift rates by 25-basis points over the remainder of the year, while the rate outlook for the BoE is less certain. There is now increased speculation that the next move from the Bank of England would be a rate cut given fears about the impact from the subprime mortgage fallout on UK banks.

The sterling remains pressured against the greenback and yen following yesterday’s news of the UK’s Northern Rock bank. The news fuelled fears of large subprime exposure among other UK banks, raising expectations that the BoE may soon ease its bench-mark lending rate. In the session ahead, UK CPI data is seen up 0.4% in August, versus a 0.6% decline in the previous month, while the annualized figure is expected to remain unchanged at 1.9% -- beneath the BoE’s 2% inflation target. The retail price index is estimated to edge up to 4.0% versus 3.8% from the previous year and seen reversing the prior month’s 0.6% decline to edge higher by 0.4%.

The key highlight will be the FOMC’s monetary policy announcement, in which a 25-basis point rate cut to 5.0% is largely anticipated. It is worth noting that Fed Board members have delivered conflicting messages, with some maintaining their mantra of keeping inflationary pressure in check. It will be interesting to see whether the Fed responds to market calls for a cut while concurrently tempering inexorable expectations for further easing over the coming months. If a 25-basis point reduction does materialize, Bernanke will likely perform a balancing act between quelling burgeoning recessionary fears and containing runaway expectations for a series of rate cuts – given lingering concerns from Board members about inflation.