Price Index (MoM) (OCT) (13:30 GMT; 08:30 ET)
Expected: 1.2%
Previous: 1.0%

Import Price Index (YoY) (OCT) (13:30 GMT; 08:30 ET)
Expected: 9.0%
Previous: 5.2%

How Will The Markets React?

With the US dollar trading at record lows, there are concerns that import price inflation will rise significantly. The prospect of increased price pressures only compounds the problems that the Federal Reserve already faces as they’ve slashed the fed funds rate by 75 basis points since September in an attempt to forestall a broad-based economic recession and a crash in the US stock market. However, none of these risks appear to have diminished yet, and fed fund futures are pricing in a 70 percent chance of yet another 25 basis point cut on December 11. What about that pesky inflation issue? Won’t more accommodative monetary policy only fan price pressures? This topic may come to the forefront on Friday as the US import price index is expected to have risen 1.2 percent in October from the month prior while the index is also forecasted to have surged 9.0 percent from a year earlier, the sharpest rise in two years. Such a result will only increase anticipation for next week’s CPI release, which is also very likely to highlight the rising inflation pressures in the US economy, which effectively leaves the Federal Reserve’s hands tied. Will they continue to attempt to stave off a collapse in the economy and equity markets while abandoning their price stability mandate, or will they leave monetary policy unchanged to give themselves more time to plot their next move? As usual, fixed income markets may be the sole respondents to the data while the result is unlikely to be optimistic for US stock markets, which have been battered by dismal mortgage and debt-related news and record high oil prices. Meanwhile, with sentiment on the US dollar remaining grave, forex traders may not be quick to pick up on the potential for a hawkish Federal Reserve.

Bonds – 10-Year Treasury Note Futures

While Treasuries have held firmly in their uptrend, the failure to break through the range high at 111-145 and heavy resistance looming at 111-20/112-00 may keep more bullish price action from unfolding. Nevertheless weakness in stocks is helping keep price elevated, but without a break of said resistance levels soon, bullish signals may fade away. On Friday, the release of the US import price index could send Treasuries plummeting as a sign that inflation may prevent the Federal Reserve from cutting rates further. Extreme moves lower may look to target the 110-00 level.

FX – EUR/USD

Broad based weakness in the greenback has allowed EUR/USD to tear higher, with records being accomplished daily. Recently, comments from a Chinese official suggesting that the government would diversify their $1.4 trillion in FX reserves away from US dollar sent EUR/USD spiking to 1.4729. Furthermore, hawkish commentary by ECB President Trichet has helped underpin a bid tone for the pair, but price action for the pair remains very much a “US story.” On Friday, the US import price index is expected to rise significantly, which could bring the inflation issue to the forefront once again. Indeed, with price pressures steadily building, the Federal Reserve may not be able to cut rates further without undermining their price stability mandate. Under normal circumstances, the US dollar would perhaps rally on the news. While there is potential for EUR/USD to pull back to the 1.4550 level by this week’s close, extremely dour sentiment on the greenback and a forecasted drop in the University of Michigan Consumer Confidence survey at 10:00 EST may simply lead EUR/USD to test 1.4700 once again, with sharp gains targeting 1.4785.

Equities – Dow Jones Industrial Average

The sharp drop in the Dow on Wednesday managed to break through support at the 50 percent Fibonacci retracement level of the 12,517.94 – 14.198.10 bull wave at 13,358.02, which may signal that the index has more room to fall. However, the Dow also stopped short at the supporting trendline of a channel formed from the decline from the record highs. Can the Dow hold above 13,300? With additional near-term support at the 200 SMA at 13,212 and the 61.8 percent retracement level at 13,158, the index may be able to stage a bounce. However, much of this depends upon the market’s sentiment on Thursday given the sharp 4.9 percent decline in the Shanghai Index during the Asian trading session, as well as reports that Morgan Stanley joined Merrill Lynch & Co. and Citigroup Inc. in booking losses amounting to $3.7 billion in the two months through October 31. Furthermore, on Friday, the release of the US import price index could suggest that the Federal Reserve has no room to cut rates further without completely abandoning their price stability mandate. As a result, the data on Friday could drive the Dow even lower, with a break of the 13,000 level targeting the August lows of 12,517.94.

Terri Belkas is a Currency Strategist at FXCM.