Higher CPI based on higher energy costs has 3 main impacts which can all be interpreted as negative for the economy – less chance of Fed easing, less income for discretionary consumer spending, and weaker profit margins for producers. How the USD reacts will be interesting considering the weakness the greenback showed in Thursday’s session. Which wins out? The expectation that higher gas prices will undermine the recovery or the continued impression that Fed QE3 has a lower chance of being put forward

Key to end this week will be Friday’s non-farm payroll data. December’s 200K gain was a big boost to the idea that momentum in the US economy is maintaining, if not building on itself, even if temporarily. A better than expected reading can give risk sentiment a pop, benefiting “higher yielding” currencies at the expense of the US dollar and Japanese Yen. A disappointing figure would help risk aversion as any signs of slowdown in the US would increase concerns about the drag on the global economy.

We talked about the state of the US consumer – the factors that had led to a pickup in spending in late 2011, but also the headwinds facing spending in the early part of 2012.The key element to turn the relatively better US data in the last few months into something more meaningful would be the ability of the private sector to continue to step up hiring and a pick-up in wages. Today’s data showed personal incomes rose 0.5% in December, while spending was flat.

A soft GDP report begs an important question. Will this report make it more likely that the Fed will undertake more quantitative easing. If so, that would have the effect of weakening the USD, even when the normal reaction to soft growth data would be a move towards safety and risk aversion and therefor towards the USD. Looking at the Dollar index we see the possibility that the technical line up with a swing in this fundamental bias.

For November coming as it did with turbulence in the commodity and stock markets, a flow towards the safety of the US bond market makes sense and so this figure – which can be quite volatile – will be measured as an indicator for the overall demand for US securities.