The Week Ahead – US CPI Report, UK Wage Growth, the ECB, and China in Focus

Highlights

• US inflation may prompt more Fed hikes, with the US CPI Report out on Wednesday.
• ECB’s monetary policy decision in focus on Thursday, with the ECB Press Conference the key driver.
• The Chinese economy will be in the spotlight on Friday. Numbers must improve to support riskier assets.

For the Dollar:

The US CPI Report for August will garner interest on Wednesday. After the latest Core PCE Price Index and personal spending numbers, a pickup in inflation would fuel bets on more Fed rate hikes. The Fed prefers the Core PCE Price Index as the measure of inflation.

On Thursday, US retail sales and initial jobless claims also need consideration. Tight labor market conditions support wage growth. A pickup in wage growth counters the effects of Fed rate hikes, fueling consumption and demand-driven inflation.

Michigan Consumer Sentiment numbers for September wrap up another pivotal week for the dollar on Friday.

For the EUR:

The EUR faces drama, with ECB monetary policy and economic uncertainties testing buyer appetite.

German and Eurozone ZEW Economic Sentiment figures kickstart the week on Tuesday. The deteriorating macroeconomic environment suggests a sharp fall in sentiment.

Eurozone industrial production (Wed) will likely affirm manufacturing sector woes. However, Eurozone wage growth for the second quarter (Fri) will influence ECB monetary policy expectations. A pickup in wage growth would fuel spending and demand-driven inflation, an ECB concern.

While the economic indicators will provide direction, the Thursday ECB monetary policy decision and press conference will be the focal point. Economists expect the ECB to stand pat on monetary policy, leaving ECB President Lagarde to guide the markets.

Beyond the data, investors should monitor the ECB calendar and the news wires for ECB commentary throughout the week.

For the Pound:

The Pound will be in the spotlight this week. Wage growth and employment figures will need consideration on Tuesday. BoE Governor Andrew Bailey dampened expectations of further BoE rate hikes. Governor Bailey forecasted a sharp fall in inflation, removing the need for further rate hikes. However, a marked pickup in wage growth could test the pause theory.

On Wednesday, the monthly GDP Report will also have an impact. Economic indicators have shown cracks in the UK economy. A contraction would raise bets on a BoE-induced recession.

Beyond the numbers, Bank of England member speeches will also influence. BoE Chief Economist Huw Pill is on the calendar to speak on Monday. Comments on inflation, the economy, and interest rates will need consideration.

For the Loonie:

The Loonie will sit in the hands of the monthly oil reports and market risk sentiment. OPEC releases its monthly report on Tuesday, with the monthly IEA report on Wednesday.

With the deteriorating macroeconomic environment, more negative economic indicators from China would deliver further USD/CAD strength. The Canadian Dollar is a commodity currency, exposing it to deteriorating macroeconomic conditions and a weak demand environment.

Wholesale sales and foreign securities purchase numbers from Canada are unlikely to influence the USD/CAD pair.

Out of Asia

For the Aussie Dollar:

NAB Business Confidence figures for August will draw interest on Tuesday. Investors should also consider the sub-components, including employment, forward orders, and purchase and labor costs. With elevated interest rates, weakening business conditions through trading and profitability could force firms to reduce headcounts.

Employment figures for August will provide the Aussie Dollar with direction on Thursday. The July Report eased bets on further RBA rate hikes. A weaker labor market environment would force consumers to tighten their purse strings, reducing consumption and easing demand-driven inflationary pressures.

For the Kiwi Dollar:

Electronic card retail sales (Tues) and Business NZ PMI numbers (Fri) will draw interest. However, we expect economic indicators from China to have more impact on the Kiwi Dollar.

For the Japanese Yen:

The Japanese Yen continues to require close attention. Last week, weak household spending supported the ultra-loose monetary policy position of the Bank of Japan.

Economic indicators are unlikely to turn the tables this week. BSI manufacturing survey-based (Wed) and industrial production (Thurs) numbers are in focus. With the BoJ focused on wage growth, demand, and demand-driven inflation, neither report should influence BoJ’s policy goals.

However, warnings of a Yen intervention could cap the downside for the Yen.

Out of China

The Chinese economy will remain an influencer this week. Investors are looking for economic conditions to begin improving.

Industrial production, retail sales, fixed asset investment, and unemployment numbers will move the dial. We expected industrial production and retail sales to garner the most interest.

Weaker-than-expected numbers and a lack of further policy measures to boost growth would weigh on riskier assets.