Week Ahead: What Are the Markets Watching This Week?

Can you believe we’re entering the final full week of January already, and what a week we have with three major central bank rate decisions to get our teeth into, together with several tier-1 economic data on the docket.

BoJ Claims Central Bank Spotlight on Tuesday

Mondays are notoriously quiet in the markets, and tier-1 data is seldom released. Tuesday, however, welcomes the Bank of Japan (BoJ) rate decision, usually at around 3:00 am GMT. As most will be aware, it has not been the best of starts to the year for the Japanese yen (JPY); in fact, the USD/JPY is up +5.1% MTD and has reclaimed the entire portion of December’s -4.9% downside move, helped by widening rate differentials.

With easing inflation and a slowdown in wage growth, it is widely expected that the central bank will maintain its negative Overnight Policy Rate at -0.1%; the focus, thus, turns to any clues from Governor Kazuo Ueda on when the central bank may exit NIRP; markets anticipate seeing some movement in Q2 this year.

Global PMIs and BoC to Take the Stage on Wednesday

Wednesday will be busy; manufacturing and services PMIs for January from Europe, the UK and the US will be on the watchlists of many traders and investors this week, in addition to the Bank of Canada (BoC) rate decision claiming the spotlight at 3:00 pm GMT.

In light of persistent inflationary pressures, particularly from the core measure, it is widely anticipated that the central bank will hold the Overnight Target Rate at 5.0% for a fourth consecutive meeting. However, short-term interest rate markets forecast the first 25bp cut in Q2 this year.

The latest Business Outlook Survey for Q4 2023 observed firms report less favourable conditions in Q4, though many did note that they anticipate sales to stabilise. The report also highlighted that ‘high interest rates have negatively impacted a majority of firms, and these firms have relatively muted sales outlooks, modest investment intentions and weak hiring plans’. Additional points from the release were that most firms are not looking to add new staff, and ‘wage growth on average is expected to be higher than normal over the next 12 months … the majority of firms think wage growth will be back to normal by 2025’.

Advance GDP and ECB Rate Decision on Thursday

The European Central Bank (ECB) rate decision will be live on Thursday at 1:15 pm GMT, and markets are pricing a no-change for all three benchmark rates for a third consecutive meeting. Following the ECB meeting minutes offering little in terms of a timeline for rate cuts, we’re unlikely to see much development this week. As a result, attention will largely be focussed on the accompanying monetary policy statement and presser 30 minutes later from ECB President Christine Lagarde.

Markets are assigning around an 80% probability of a 25bp rate cut in April, with nearly 140bps of cuts priced for the year. An important point to consider as we head into the rate decision is the disparity between the ECB and the markets. On the one hand, markets forecast nearly six 25bp of cuts this year, with the first coming as soon as April, but ECB’s President Lagarde has noted that ‘short of another major shock’ the ECB has reached a peak in rates, but has pushed back against the market consensus and suggested a rate cut is more likely in the summer. Should we see this message stressed this week, this could underpin the euro as rate-cut forecasts are pared back.

The advance (first) estimate for US GDP for Q4 is also a key release this week at 1:30 pm GMT. Markets and economists are forecasting economic activity to slow in Q4, and is poised to cool further into 2024. Economists’ estimates (median) indicate US growth to increase by an annualised 2.0% in Q4 (forecast range is currently between 2.8% and 1.3%), down from 4.9% reported in Q3. Interestingly, the latest estimate from the Atlanta Fed GDPNow forecasting model is at 2.4% growth for Q4.

Consequently, an upside surprise nearer the upper range estimate (2.8%) should not raise too many eyebrows and could bolster a dollar bid the closer the release is to that upper extreme forecast. Other noteworthy data this week include the Core PCE Price Index on Friday, personal income and spending and home sales data.

G10 FX (5-Day Change):

 

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