What to watch in the week ahead

Markets begin this week cautious of the dollar. Even after leaving the disappointing US non-farm employment data to one side, investors are nervous ahead of Monday's announcement on how much US Treasuries will be sold at Wednesday's and Thursday's 10- and 30-year Treasury bond auction. The dollar currency futures index (DXY) is trading around 89.07, a new low for the year and less then a point away from the January 3rd 1997 low of 88.03. Foreign investment into the US could also be under pressure from heavy repatriation of overseas deposits by Chinese banks and the growing attraction of Asia as an alternative investment destination to the US. This is the latest finding from the BIS quarterly report released Sunday that highlights the growing stress on US budget deficit funding needs.

Undoubtedly the market highlight in the US, will be the FOMC statement on Tuesday. Rates will be left unchanged and the easing bias is likely to be maintained, despite evidence of strong economic recovery. There have been mixed signals on whether the commitment to keep rates low 'for a considerable period' will also be retained. We think this phrase is so vague as to be meaningless. There is certainly a growing feeling at the Fed that it is causing more trouble than it is worth. Whether it stays or goes, there is no desire for an imminent tightening, but the rest of the statement will be more upbeat on the economy. Moreover, whatever the Fed says on Tuesday, we expect a decent retail sales report on Thursday and another strong consumer confidence report on Friday.

The strong rand means that South Africa will cut rates by at least 100bp on Thursday, with a good chance of more to come in Q1. We also expect Ghana to ease, though Asian central banks (led this week by S Korea and Thailand) are now on hold as regional economies boom.

The Bank of England is set to adopt a new inflation target based on the European harmonised measure (HICP). This will be confirmed in the Treasury's Pre-Budget Report (PBR) on Wednesday. The key point is that the switch from a 2.5% target for RPIX to a 2.0% target for HICP will mean a shift from above target to below target inflation: RPIX inflation is currently 2.7% and HICP just 1.4%. This will also help to keep interest rates low. Indeed, UK interest rate expectations could fall sharply this week as the markets refocus on the new numbers.

Chinese Premier Wen's visit to the US will also garner the headlines this week. The agenda will cover cross-straits tensions, trade and protectionism - clearly areas where substantial differences have developed. But both administrations have made strong efforts in recent days to smooth relations and a successful visit is likely. Six-nation talks also resume this week on North Korea's nuclear programme. Here there is more scope for worrying statements, given the North's desire to keep the West nervous and so maintain pressure for increased aid. The ASEAN nations and Japan also meet on Wednesday to discuss trade relations