The Week Ahead: The Bank of Japan, Inflation, and China in the Spotlight

Highlights

• The Bank of Japan and forward guidance on negative rates in focus on Tuesday.
• UK, Eurozone, and US inflation to test sentiment toward central bank monetary policy.
• China stimulus chatter and the PBoC are also focal points in the week ending December 22.

The US Dollar

On Tuesday, the US housing sector will be in the spotlight. The housing sector remains a litmus test for the US economy. Deteriorating housing sector conditions could impact consumer confidence and consumption. US private consumption contributes over 65% to the US economy. Weak housing sector figures would support the more dovish Fed rate path.

Consumer confidence figures will need consideration on Wednesday. A pickup in consumer confidence would support bets on a soft landing. An upward trend in consumer confidence signals a pickup in consumption.

On Thursday, Q3 GDP, jobless claims, and Philly Fed Manufacturing Index numbers will garner investor interest. Steady jobless claims and improving manufacturing sector activity would support buyer demand for the US dollar.

However, Personal spending, Core PCE Price Index, and personal income figures warrant consideration on Friday. A pickup in inflationary pressure and uptrends in personal income/spending could raise doubts about the Fed interest rate projections.

The EUR

On Monday, the EUR/USD will be in the hands of German business sentiment. An improving business sentiment environment would drive buyer demand for the EUR/USD. Rising trends in business sentiment could signal an improving macroeconomic environment, supporting hiring and private consumption.

However, Eurozone inflation numbers for November could have more impact. Last Thursday, the ECB poured cold water on ECB rate cut discussions. Softer-than-expected numbers could support the bets on a Q1 2024 rate cut.

On Wednesday, the German economy will be in the spotlight, with producer prices and consumer sentiment in focus. Producer prices would give investors a view of the demand environment and an outlook for consumer price inflation. Weaker demand would force producers to lower costs to win new business. Lower costs would dampen demand-driven inflationary pressures.

However, German consumer confidence will also move the dial. Improving consumer confidence could signal a pickup in consumption, fueling demand-driven inflationary pressures. The net effect could be a higher-for-longer ECB rate path to curb spending and tame inflation.

Beyond the economic calendar, investors must monitor ECB commentary. ECB Chief Economist Philip Lane (Mon/Wed/Thurs) is on the calendar to speak. ECB Executive Board members Isabel Schnabel (Mon), Andrea Enria (Tues), and Frank Elderson (Tues) will also deliver speeches. Deviation from the higher-for-longer guidance at the ECB press conference would impact the EUR/USD.

The Pound

On Wednesday, consumer price inflation will put the Pound in focus. Sticky inflation would support the Bank of England’s dismissal of interest rate cut discussions. Hotter-than-expected figures could give the BoE reins to the hawks.

However, economic indicators on Friday will also move the dial. Q3 GDP and retail sales figures will garner investor interest. While GDP numbers need consideration, retail sales figures may have more impact. A pickup in retail sales would fuel demand-driven inflation, forcing the BoE to keep rates higher for longer.

An elevated interest rate environment could impact borrowing costs and reduce disposable income. The net effect could be a pullback in consumer spending, dampening demand-driven inflationary pressures.

Away from the numbers, investors must consider Bank of England commentary. MPC members Ben Broadbent (Mon) and Sarah Breeden (Tues) are on the calendar to speak.

The Loonie

On Tuesday, inflation figures for November will influence the buyer appetite for the Loonie. Softer inflationary pressures would drive buyer demand for the USD/CAD.

However, October retail sales figures and GDP numbers will also move the dial. Retail sales figures are out on Thursday, with the GDP report on Friday.

Other stats include house prices and RMPI numbers. However, these will likely play second fiddle to the inflation, retail sales, and GDP figures.

From elsewhere, crude oil prices will also influence trends for the Loonie.

The Australian Dollar

The RBA meeting minutes on Tuesday will influence demand for the Aussie dollar. After the dovish rate statement, the meeting minutes could support bets on the RBA ending its rate hike cycle.

Beyond the economic calendar, stimulus chatter from Beijing and iron ore prices need consideration.

The Kiwi Dollar

The Kiwi dollar will be in the hands of consumer sentiment. On Monday, the Westpac Consumer Sentiment Index for Q4 will draw investor interest. A pickup in consumer confidence would support the buyer appetite for the Kiwi dollar.

Private consumption contributes over 50% to the New Zealand economy. An improving consumer confidence environment would support consumer spending and the economy.

The Japanese Yen

On Tuesday, the Bank of Japan will put the Japanese Yen in the spotlight. Economists expect the BoJ to leave interest rates unchanged at -0.10%. Barring a surprise BoJ policy move, the focus will be on the Monetary Policy Statement and the press conference.

After mixed signals about the timing of an exit from negative rates, more assertive guidance will influence the buyer appetite for the USD/JPY.

However, economic indicators also need consideration later in the week. Trade data (Wed) and national inflation (Fri) could influence sentiment toward BoJ monetary policy. Much will depend on the Bank’s focal points to exit negative rates.

Nonetheless, weaker trade terms and softer inflation numbers could allow the BoJ to delay any move. In recent speeches, the BoJ has highlighted concerns about the macroeconomic environment and demand.

Out of China

On Wednesday, the PBoC will be in the spotlight. Recent economic indicators from China painted a rosier picture of the Chinese economy, contrasting with survey-based numbers. However, the markets expect further stimulus to shore up the economy.

Economists expect the PBoC to leave 1-year and 5-year loan prime rates (LPR) unchanged at 3.45% and 4.2%, respectively. A surprise PBoC cut in LPRs could drive demand for commodity currencies and riskier assets.