The Week Ahead: Inflation Numbers Put the Fed, ECB, and BoJ in the Spotlight

Highlights

• US CPI Report to decide the fate of the January Fed interest rate decision.
• German economic indicators could force the ECB to reconsider its stance on interest rates.
• Geopolitics, stimulus chatter from Beijing, and economic data from China also need consideration.

The US Dollar

On Thursday, the US CPI Report warrants investor attention. After the better-than-expected US Jobs Report, hotter-than-expected inflation numbers could temper bets on a Q1 Fed rate cut.

In December, a pickup in wage growth and tight labor market conditions could drive disposable income higher. An upward trend in disposable income could fuel consumer spending and demand-driven inflation.

The Fed could respond by maintaining interest rates at current levels for longer to curb spending and dampen demand-driven inflation.

Producer price numbers for December will garner investor interest on Friday. A pickup in demand could allow producers to pass rising costs to consumers by raising prices. Producer prices are leading indicators for consumer price inflation.

Other stats include trade data and the weekly jobless claims report. However, barring a marked increase in US initial jobless claims, the focus will be on the inflation reports.

Beyond the numbers, FOMC member commentary also needs monitoring. Reactions to the US Jobs and Inflation reports would move the dial.

The EUR

The German economy will put the EUR/USD in focus early in the week. On Monday, German factory orders and trade data will draw investor interest. Recent economic indicators, including private sector PMIs, sounded the recession bell. Another slide in factory orders and weaker trade terms could drive bets on a Q1 2024 ECB rate cut.

On Tuesday, German industrial production numbers also need consideration. Weaker production would align with expectations of a euro area recession.

In the second half of the week, finalized inflation figures from Spain and France will be in focus. Upward revisions could force the ECB to keep rates elevated at the expense of the economy.

Beyond the numbers, the ECB Economic Bulletin and ECB commentary will also influence EUR/USD price trends. ECB Executive Board members Luis de Guindos (Wed), Isabel Schnabel (Wed), and Chief Economist Philip Lane are on the calendar to speak.

The Pound

On Monday, UK mortgage rates kickstart the week for the Pound. UK banks have started cutting mortgage rates in anticipation of BoE rate cuts in 2024. Downward trends in mortgage rates would increase disposable income.

Upward trends in disposable income could fuel consumer spending and demand-driven inflation. In response, the BoE could leave interest rates unchanged for longer, curbing spending and softening demand-driven inflation. Significantly, UK banks could lift rates higher if the BoE shows no sign of cutting rates.

UK retail sales figures will draw investor interest on Tuesday. The BRC Retail Sales Monitor will give the markets a snapshot of consumer spending at the end of the year.

However, November GDP, manufacturing and industrial production, and trade data (Fri) will have more impact. Another economic contraction and a slide in manufacturing production could pressure the BoE to adjust its rate path outlook.

Beyond the numbers, BoE Governor Andrew Bailey and BoE members will attend the Treasury Select Hearing on the December Financial Stability Report. The hearing will take place on Wednesday, January 10.

The Loonie

On Tuesday, building permits and trade data will influence the buyer appetite for the Loonie. While building permits need consideration, trade data will have more impact. Weaker trade terms would reflect a weakening global demand environment, pressuring commodity currencies.

However, geopolitics and crude oil prices also need consideration.

The Australian Dollar

On Tuesday, building approvals and retail sales will influence near-term trends for the Aussie dollar. Housing market conditions remain a consideration for the RBA. However, retail sales will have more impact. A sharp increase in retail sales could fuel demand-driven inflation and force the RBA to consider another rate hike.

Trade data would also move the dial in the second half of the week. Improving trade terms would drive buyer demand for the Aussie dollar. Australia has a trade-to-GDP ratio above 50%, with 20% of the workforce in trade-related jobs.

Other stats include home loans. However, the numbers should have a limited impact on the Australian dollar, barring a sharp fall in home loans.

The Kiwi Dollar

Geopolitics, the Chinese economic calendar, and stimulus chatter from Beijing will influence the Kiwi dollar. There are no economic indicators from New Zealand for investors to consider.

The Japanese Yen

It is another shortened week for the Japanese Yen. However, it could prove pivotal. Household spending and inflation numbers figures could influence bets on the timing of a BoJ pivot from negative rates.

The BoJ awaits the outcome of the spring wage growth negotiations. A marked pickup in wage growth would signal a pickup in spending and demand-driven inflation. The BoJ has signaled its intent to exit negative rates in response to a pickup in demand-driven inflation.

However, weak household spending numbers and softer inflation could allow the BoJ to delay a move away from ultra-loose policy. The two reports are out on Tuesday.

Out of China

On Wednesday, new loans need consideration. A slide in new loans would signal a weakening economic environment. The markets could forgive weaker numbers. In December, the PBoC injected liquidity into the financial system to support lending and the economy.

However, consumer and producer price inflation numbers and trade data (Fri) will influence market risk sentiment. A more marked decline in producer prices could spook investors hoping for a turnaround in the Chinese economy. Trade terms will indicate the effectiveness of stimulus measures and the global and domestic demand environment.