The Week Ahead: The Bank of Japan, the ECB, and US Inflation in Focus

Highlights

• US Services PMI numbers, inflation, and personal income/spending to impact bets on a March Fed rate cut.
• The ECB monetary policy decision and press conference will be pivotal for the EUR.
• Stimulus chatter from Beijing and the Bank of Japan’s monetary policy decision also needs consideration.

The US Dollar

On Wednesday, preliminary private sector PMIs for January warrant investor attention. The S&P Global Services PMI will likely impact the US dollar and market risk sentiment. An improving US services sector environment could reduce bets on a March Fed rate cut.

Q4 GDP numbers, core durable goods orders, and jobless claims data will garner investor interest on Thursday. The GDP numbers and labor market data will likely have more influence. Weaker-than-expected GDP figures and a spike in jobless claims could raise bets on a March Fed rate cut.

However, inflation and personal spending/income numbers will influence interest rate expectations on Friday. Softer inflation numbers and a pullback in income/spending would increase bets on a March Fed rate cut.

The EUR

Preliminary private sector PMIs for France, Germany, and the Eurozone will influence EUR/USD on Wednesday. The Services PMI numbers will have more impact. The services sector remains the driving force behind inflation. Weaker service sector activity and downward trends in input prices could incentivize the ECB to begin discussing rate cuts.

On Thursday, German business sentiment figures also need consideration. Weaker sentiment could raise concerns about the labor market amidst the threat of a prolonged recession. A deteriorating macroeconomic environment could impact hiring plans and affect private consumption.

However, the ECB monetary policy decision (Thurs) will be the focal point. The markets expect the ECB to leave interest rates unchanged, putting investor focus on the ECB press conference. ECB President Lagarde and voting members have poured cold water on discussions about rate cuts. The outlook toward the economy, inflation, and interest rates will warrant investor attention.

On Friday, German consumer confidence figures for February will also need consideration. A weakening consumer confidence environment could signal a pullback in consumer spending. Downward trends in consumer spending could further impact the German economy. German private consumption contributes over 50% to the German economy.

Beyond the numbers, ECB commentary will move the dial. ECB President Christine Lagarde is on the calendar to speak on Monday and at the ECB press conference.

The Pound

On Wednesday, preliminary private sector PMIs will put the Pound in the spotlight. Investors must focus on the services PMI, with the services sector accounting for over 70% of the UK economy.

A pickup in UK services sector activity could delay Bank of England discussions about interest rate cuts. Last week, UK inflation unexpectedly accelerated, while retail sales plummeted. A pickup in service sector input prices would align with Bank of England plans to delay discussions on rate cuts.

Beyond the numbers, investors must monitor Bank of England speeches.

The Loonie

On Wednesday, the Bank of Canada will dictate near-term trends for the Loonie. The markets expect the BoC to leave interest rates at 5.00%. However, inflation remains a bugbear. Forward guidance on inflation and the interest rate trajectory need consideration. A higher-for-longer rate path could impact the USD/CAD.

Housing sector data (Mon) and wholesale sales figures (Fri) are unlikely to influence near-term trends for the Loonie.

The Australian Dollar

On Tuesday, business confidence numbers for December will impact buyer demand for the Aussie dollar. A weakening business sentiment environment could impact business investment and the Australian labor market.

Weaker labor market conditions could affect wages and disposable income. Downward trends in disposable income could reduce consumer spending and dampen demand-driven inflation.

From elsewhere, investors must monitor stimulus chatter from Beijing. A meaningful stimulus package would drive buyer demand for the Aussie dollar.

China accounts for one-third of Australian exports. A stimulus package could boost demand and support the Australian economy and the Aussie dollar. Australia has a trade-to-GDP above 50%, with 20% of the workforce in trade-related jobs.

The Kiwi Dollar

On Wednesday, Q4 inflation numbers will influence buyer appetite for the Kiwi dollar. Softer inflationary pressures would support a more dovish RBNZ rate path.

However, investors must consider stimulus chatter from Beijing and geopolitical risks. A convincing stimulus package from Beijing would signal a pickup in demand. However, increasing geopolitical tensions would impact the demand for commodity currencies.

The Japanese Yen

On Tuesday, the Bank of Japan will put the Japanese Yen in the spotlight. The markets expect the Bank of Japan to leave interest rates in negative territory. However, forward guidance on the timing of a BoJ pivot from negative rates warrants investor attention.

Softer inflation numbers from Japan eased pressure on the BoJ to exit negative rates. Wage growth and household spending numbers contributed to bets the BoJ will leave rates in negative territory. Wage negotiations in March remain the focal point.

However, concerns about the macroeconomic environment and views on inflation could see the BoJ delay a pivot beyond April.

On Tuesday, the Bank of Japan’s core CPI numbers also need consideration. Softer inflation numbers could signal a delay to a BoJ pivot.

Trade data and service sector PMI numbers (Wed) are unlikely to impact sentiment toward BoJ monetary policy. The focus will likely be on inflation and wage growth.

However, Tokyo inflation numbers on Friday would likely influence BoJ policy expectations. A continued fall in inflation toward the BoJ target (2%) could counter any bets on a BoJ pivot.

Out of China

The PBoC will set the tone for the week. On Monday, the PBoC will set the 1-year and 5-year Loan Prime Rates. Economists expect the PBoC to leave Loan Prime Rates unchanged. A cut in Loan Prime Rates could drive demand for riskier assets and commodity currencies, including the AUD and NZD.

Beyond the numbers, investors must consider stimulus comments from Beijing.