Why This Is Going To Be A Huge Week for the Reflation Trade

  • Trump reflation trade may get a boost from inflation measure
  • Tax-plan speculation likely to carry greenback through month

How Big of a Risk Is Inflation to the U.S. Economy?

What’s sandwiched between Janet Yellen’s congressional testimony may prove to be just as important for currency and bond markets when it comes to keeping the Trump reflation trade afloat.

Even after President Donald Trump’s promise of a “phenomenal” tax plan helped send the dollar to its first weekly gain since December and triggered a resumption of risk-on sentiment, doubts remain over whether growth is strong enough for the Federal Reserve to tighten as much as has forecast for this year.

The one thing everyone should be keeping an eye on is the release of January inflation data on Wednesday between Yellen’s appearances before the House of Representatives and the Senate. While the Fed prefers to watch an index tied to purchases, the growing rate of consumer inflation and its erosion of disposable income by way of declining real household earnings is becoming hard to ignore. The CPI headline number has risen from below 0.5 percent in September of 2015 to a January forecast of 2.4 percent.

The dollar rally would also likely gain momentum from Yellen’s testimony next week if the Chair leans hawkish. That would probably raise the probability of a March rate hike closer to 50 percent from current odds of about 30 percent. BlackRock Inc.’s Rick Reider said a March rate hike “is on the table,” given the Fed is close to its dual mandate on employment and inflation with the U.S. economy expanding.

Trump’s pledge that his tax plan would come in two-to-three weeks lines up around when the so-called State of the Union address would likely take place, giving the former reality TV star a possible automatic prime-time national platform. That may be enough to maintain the dollar optimism in the meantime.

The greenback as measured by the Bloomberg Dollar Spot Index closed above 1237.47, a mean reversion resistance. A sustained move above that level would likely see the dollar trade higher toward second reversion resistance at 1268.40.

The revival of the reflation trade and a response by the Fed that mirrors the central bank’s so-called dot plot for three rate hikes this year will likely set the tone for a long and sustained dollar rally. Finally a trend impatient traders can bank on.

What else to watch:

Feb. 14U.K. CPI 
Fed’s Lacker in Delaware
Fed’s Kaplan in Houston
Yellen appears before Senate Banking Panel
Feb. 15ECB GDP 
U.S. CPI 
Yellen delivers semi-annual testimony to House Panel
Fed’s Rosengren in New York
Fed’s Harker in Philadelphia
Australian Jobs Data
Feb. 16ECB’s Coeure speaks
U.S. to sell 30-YR TIPS
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