UK Consumer and Retail Price Index (DEC) (09:30 GMT; 04:30 EDT)
                  CPI (YoY)  RPI (YoY)
Consensus:     2.9%       4.3%
Previous:         2.7%       3.9%

Outlook: As the most potentially market moving news releases of tomorrow’s trading sessions, UK Consumer and Retail Price inflation data will likely dominate the ledger for foreign currency trading desks. Given the recent focus on the Bank of England and future of UK interest rates, there is no question that upcoming inflation data could have a pronounced effect of market expectations for the future of BoE interest rate hikes. In fact, it serves to reason that tomorrow’s figures may surprise to the upside. The central bank’s decision to raise interest rates by 25 basis points at its recent meeting suggests that it may have had an advance peek at year-end price inflation figures. If this is indeed the case, look for tomorrow’s CPI print to beat consensus estimates of 2.9 percent, breaching 3.0 percent and forcing BoE Governor Mervyn King to write a letter to Chancellor of the Exchequer Gordon Brown to explain why headline price growth has breached the 3.0 percent mark.

Previous:  UK price inflation jumped to its highest in 9 years, providing a clear uptrend for headline inflation and leaving risks that the Bank of England would move to raise interest rates through the medium term. As we all know, this is precisely what happened at the bank’s most recent meeting, with the Monetary Policy Committee opting to raise overnight lending rates to 5.25 percent. The surprise hike was enough to send the British Pound soaring higher against major counterparts, while interest rate-sensitive UK bond prices plummeted. Whether this may happen again will largely depend on the outcome of tomorrow’s inflation figures. With risks arguably to the topside, markets will pay close attention to hints at further BoE rate increases through the calendar year.

German ZEW Survey (JAN) (10:00 GMT; 05:00 EDT)
                     (Econ)   (Current)
Consensus:    -10.0       61.0
Previous:        -19.0       63.5

Outlook: Investor confidence in Europe’s largest economy is expected to rise to its highest level in five years as a pick up in the consumer and manufacturing sectors look to sustain the economy through the government’s tax hike. On January 1st, Angela Merkel’s planned value-added tax hike from 16 to 19 percent went into effect. The policy is harshly criticized by many who are concerned the added burden to consumers would undermine domestic spending and slow GDP from its fastest pace of expansion in six years. Looking to the data before the actual tax hike went into place reveals German’s were well prepared for the onset of the new policy. In December, unemployment fell by 108,000 people sending the national jobless rate to its lowest level since August 2002. This strength in employment was further matched by a jump in consumer sentiment to a five-year high in November. On the other hand, consumers may have shown their displeasure in the coming hike through spending data. More intimate for investors, measures of business have also shown promising statistics going into the turn of the year. In November, factory activity accelerated 1.8 percent as new orders grew 1.5 percent. Elsewhere, the DAX and ECB will also act as key measurements for sentiment. In concert with other global indices, the benchmark DAX has reached new highs. However, sentiment may be undone if the central bank reinstitutes its steady interest rate policy in the months ahead.

Previous: German investor optimism turned off of a 13-year low in December as hiring and capital investment trends help divert attention from the impending sales-tax. The expectations survey marked its first positive change in a year when it jumped from -28.5 to -19.0. This step up came as investors marked GDP that was on pace to print its strongest read in six years.  The IfW Economic Institute raised its 2006 growth forecast 0.2 percentage points to 2.6 percent for 2006, while adding 1.1 percentage point to 2007’s outlook to 2.1 percent. This trend has found much of its strength in consumer spending which finds its support from a jobless rate at a four-year low and a significant reduction in energy costs. Elsewhere, from the current situation indicator, a new high was marked at 63.5 as the benchmark DAX stock index reached a five-year high after rising 10 percent on the month. This trend is threatened by unstable factors though as volatile energy prices loom and an expensive euro leverages the costs of German goods.

US Empire Manufacturing (JAN) (13:30 GMT; 08:30 EDT)
Consensus:  19.5
Previous:   23.5

Outlook:  Analysts predict that regional manufacturing growth slowed for the New York area, with median estimates for tomorrow’s figures pointing to the lowest read since September. This stands in contrast with a recently bullish ISM Manufacturing report, which showed that national manufacturing expansion moved into positive territory through December. Looking at historical prices, however, we see that Empire Manufacturing survey prints have a relatively low correlation with their ISM counterparts. As such, we wait to see if New York’s January manufacturing survey can give us some indication of regional strength, but overall implications for the national figure may be limited. Instead, we will look to manufacturing news from other regions to gain a broader picture of US industrial strength.

Previous:  Last month’s Empire Manufacturing number showed unexpectedly strong growth, with a jump in new orders providing the boost that caught markets off guard. These figures proved non-market moving on planned release, however, as the New York Fed had accidentally published figures a day ahead of schedule. Technical errors aside, the report showed that the domestic Manufacturing sector was much more resilient than previously estimated. Commentators point at falling energy prices and a weak US dollar as the primary boosters to industry. Recently bullish consumer spending data could only brighten outlook for domestic demand, perhaps providing risks to the upside for the coming months.

Bank of Canada Rate Decision (14:00 GMT; 09:00 EDT)
Consensus:   4.25%
Previous:    4.25%

Outlook: An overwhelming consensus among economists forecasts the Bank of Canada’s monetary policy group to pass on changing rates once again. Governor David Dodge and the other policy makers at the central bank have sat on making any changes to the overnight lending rate since May of last year as members judged the risks as relatively ‘balanced.’ Since the last meeting on December 5th, the divergence in the economies sectors and inflation gauges has widened. From the nation’s price gauges, the reflection of a modest rebound in energy prices is starting to compete with the first signs of a top in the core read. Statistics Canada’s read on annual inflation through November accelerated from 0.9 percent the month before to 1.4 percent. Alternatively, the central bank’s numbers on core inflation has stepped back from 2.3 percent, its highest level since March 2003. Both of these measures fall close to the BoC’s 2.0 percent target; and the sharp drop in energy prices through the end of December and beginning of January should draw it even closer.

Previous: The view of the economy is even further split. Canada’s economy failed to expand for the second month in a row in October, leaving overall growth at its lowest levels since the first quarter of 2003. Both the manufacturing and export sector have paced this lethargic pace as demand for the US stagnates and the unfavorable exchange rate slowly corrects from a 28-year high. On the other hand, the domestic consumer is still being monitored as the key to the economy’s future. Unemployment is at a 31-year low, which in turn has spurred competitive wage growth. However, retail sales dropped for the second consecutive month in October while the housing market begins to loose its footing. With all of these factors taken into consideration, there seems little room for a rate change, though the possibility on a downshift in rhetoric remains.

New Zealand Consumer Prices (Q4) (21:45 GMT; 16:45 EDT)
                    (QoQ)  (YoY)
Consensus:   -0.1%  2.8%
Previous:        0.7%  3.5%

Outlook: For the first time in six years, analysts are predicting that consumer prices dropped in the fourth quarter of 2006.  The combination of a strong currency and lower oil prices makes this a serious possibility.  After rising 9 percent in the third quarter, the New Zealand dollar rose another 8.5 percent in the fourth quarter against the US dollar while oil prices fell 15 percent. The rally in the currency should continue to moderate inflationary pressures and help to bring the annualized pace of growth back into the central bank’s 1 to 3 percent target range.  This would be the first in 18 months that inflation would be between that range which makes it unlikely that the RBNZ would be tempted to cut interest rates and risk pushing the inflation rate back above that.  Instead, this will give the central bank the flexibility to leave rates unchanged for the first half of the year.

Previous: In the third quarter, inflation slowed from an annualized pace of 4.0 percent to 3.5 percent.  Falling prices for gasoline, imported cars and computer equipment moderated the inflationary pressures brought on by the increases in house prices, home improvement equipment prices, and local land taxes.  In the fourth quarter, the New Zealand dollar also appreciated 9 percent against the US dollar and 8 percent against the Australian dollar.  A stronger currency helps to reduce inflationary pressures, which is evident in the third quarter data.  Even though inflation is still above the central bank’s 1 to 3 percent target range, the pace of growth is slowing, which will give the RBNZ little pressure to raise interest rates.

John Kicklighter is a Currency Strategist at FXCM.