If Tuesday’s inflation data proves to be unexpected, the Canadian dollar is likely to respond immediately, though its reaction may be more severe in the case of an upside surprise.

With capital flows one of the main issues dogging the dollar, an improvement in the Current Account status could be of help to the dollar and may push EUR/USD further below the key 1.4500 level.

If the CPI data prints event hotter than the already elevated market expectations, it may temper any further rate cut expectations from the Fed as the inflationary pressures may outweigh concerns about the slowdown in the US economy.

A strong November retail sales report could ignite a bid for the dollar and the Dow on Thursday, though it may be brief as traders grapple with the implications of the FOMC’s 25bp cut and policy statement that essentially left all options open going forward.

The US import price index is expected to have surged 11.0 percent from a year earlier – the sharpest rise in over twenty years. And Fed fund futures continue to price in multiple rate cuts next year. Won’t more accommodative monetary policy only fan price pressures?

Given all of the dovish potential surrounding the upcoming FOMC meeting, there may be more gains in store for Treasuries and US equities, while additional weakness may await the US dollar.

The release of UK CPI on December 18, which is anticipated to show that consumer price growth accelerated faster than the Bank of England’s 2.0 percent target, could prevent the central bank from cutting rates in January.

Treasuries, the US dollar, and the Dow will respond more sharply to a surprising NFP read, as the unemployment rate will likely take a backseat to the headline news. And the most severe reactions in the market will likely be if NFPs fall negative, as this will nearly assure traders that the Federal Reserve will indeed cut rates next week.

The global credit crunch that has rocked the markets since August has led European and UK interbank lending rates (Libor) to jump to multi-year highs while equity markets remain especially jittery and prone to declines. This has left both the BOE and ECB uneasy, as the instability of the markets adds to mounting downside risks to growth.

If this week’s non-manufacturing sector data signals that the services sector may be faltering, fixed income, forex, and equity markets may continue to price in a reduction in interest rates on December 11.