The Week Ahead: US Inflation, Powell, Rate Cuts Bets, and China in Focus

Investors should brace for another pivotal week for the Forex markets. US inflation numbers and Fed Chair Powell could cement investor bets on a September Fed rate cut.

The US Dollar

On Thursday, July 11, US inflation numbers for June could influence investor expectations of a September Fed rate cut. Given softer US wage growth and a higher unemployment rate, a decline in the core inflation rate could permit the Fed to cut interest rates.

However, investors should also consider the weekly jobless claims report. Another increase in continuous jobless claims could draw the attention of the Fed. A deteriorating labor market could affect wage growth and reduce disposable income. Decreasing disposable income could limit spending and reduce demand-driven inflation.

On Friday, July 12, producer prices and the Michigan Consumer Sentiment Report will garner investor attention. As a leading inflation indicator, lower producer prices could signal a softer demand-inflation environment, as producers typically reduce prices in response to falling demand.

However, improving consumer sentiment could support spending and raise demand-driven inflationary pressures.

Will the US CPI Report cement a September Fed rate cut?

Fed Chair Powell will be in the spotlight on Tuesday, July 9, and Wednesday, July 10, giving testimony on Capitol Hill. With the US unemployment rate rising and the US services sector contracting, Powell may greenlight a September Fed rate cut.

Could softer inflation numbers and a dovish Fed Chair sink the US dollar?

Meanwhile, the EUR/USD will also face scrutiny, with an ECB interest rate decision and press conference in focus.

The EUR

On Monday, German trade data could influence buyer appetite for the EUR/USD.

Recent factory orders and industrial production numbers have signaled a waning demand environment. A marked narrowing in the trade surplus may increase expectations of a German economic recession. However, the figures will unlikely immediately affect the ECB rate path. The ECB focuses on wage growth, the services sector, and inflation.

The German economy will be in focus again on Thursday and Friday. Finalized consumer (Thurs) and wholesale (Fri) inflation figures require consideration. Revisions to the preliminary German CPI numbers could impact the EUR/USD more.

While the numbers require consideration, investors should monitor comments from the ECB and the results of the French election run-off.

Meanwhile, the UK economic calendar will regain focus following the UK General Election results.

The Pound

The BRC Retail Sales Monitor will put the investor focus on the Pound and the Bank of England on Tuesday. Weaker-than-expected retail sales could signal a softer inflation environment and raise bets on a Q3 2024 BoE rate cut.

However, UK Monthly GDP numbers on Thursday could influence the BoE rate path more. An increase in economic activity might further delay a BoE rate cut. Investors should consider service sector activity and private consumption components of the report, as increases in these areas could fuel demand-driven inflation.

Beyond the numbers, investors should track speeches from Bank of England members. BoE Chief Economist Huw Pill is on the calendar to speak on Wednesday. Monetary Policy Committee Members Jonathan Haskel (Mon) and Catherine Mann (Wed) will also deliver speeches.

Views on inflation, the economic outlook, and the timing of a BoE rate cut could move the dial.

While investors speculate about the timing of the first BoE rate cut, will stats from Canada support a second from the Bank of Canada?

The Loonie

On Friday, building permit figures for May could affect buyer demand for the Loonie. Falling building permits could signal a weaker demand backdrop. A deterioration in housing market conditions may affect consumer confidence and spending.

The Bank of Canada could cushion the housing market by reducing interest rates to lower borrowing costs and bolster the housing sector.

While the housing sector data require attention, oil price trends also need consideration. The OPEC (Wed) and IEA (Fri) monthly reports could guide investors on supply and demand dynamics. Increased demand in a falling supply environment could boost oil prices and buyer appetite for the Canadian dollar.

Another commodity currency in focus is the Aussie dollar amidst rising expectations of a 2024 RBA rate hike.

The Australian Dollar

On Monday, Australian housing sector data could influence buyer appetite for the Aussie dollar.

Home loan and investment lending figures for homes will draw investor interest. Higher demand for home loans could indicate tighter housing market conditions and rising rents. Rising rents may fuel demand-driven inflation through property services and boost investor expectations of an RBA rate hike.

Consumer and business confidence numbers will attract investor attention on Tuesday. A more significant decline in consumer confidence would likely have a greater impact on the AUD/USD. Downward trends in consumer confidence could curb consumer spending and dampen demand-driven inflation.

However, investors should also consider economic indicators from China and commodity price trends, particularly iron ore.

Meanwhile, will the RBNZ surprise the markets with a monetary policy move?

The Kiwi Dollar

On Wednesday, the RBNZ and the NZD/USD will be in focus. Economists anticipate that the RBNZ will maintain the cash rate at 5.50%. Unless there is an unexpected rate cut, the Rate Statement could give investors the requirements for a rate cut.

While the RBNZ interest rate decision is the focal point, economic indicators on Friday also need consideration.

Business PMI and electronic card retail sales figures might affect investor expectations for an RBNZ rate cut, with the latter potentially having a greater impact on the RBNZ rate path. Consumer spending trends affect demand-driven inflation and RBNZ monetary policy goals.

While most central banks begin considering interest rate cuts, the Bank of Japan is eying an interest rate hike. How will the week unfold for the Japanese Yen?

The Japanese Yen

On Monday, overtime pay and average cash earnings could impact buyer demand for the Japanese Yen. Higher wages could increase disposable income and fuel household spending and demand-driven inflation.

Significantly, higher wages could ease pressure on the Japanese government to intervene to bolster the Yen.

On Wednesday, producer prices will attract investor attention. Upward trends in producer prices could signal a pickup in consumer price inflation and raise bets on a July Bank of Japan rate hike.

However, machinery orders (Thurs) and industrial production (Fri) could influence consumer sentiment and the BoJ rate path.

Waning demand could affect the manufacturing sector and labor market conditions. Consumer confidence could weaken as a result, which may affect household spending and consumer price trends.

Beyond the numbers, comments from the Bank of Japan and the Japanese government need monitoring. Intervention threats and views on the timing of a BoJ rate hike could move the dial.

Out of China

On Wednesday, consumer and producer price inflation numbers will warrant investor attention. An increase in the annual inflation rate could signal an improving demand environment and support the appetite for riskier assets.

However, trade data will also need consideration. Upward trends in imports and exports could ease concerns about the Chinese economy. An improving Chinese economy could boost trade-dependent economies such as Australia and New Zealand.

Away from the economic calendar, investors should monitor EU – China talks on tariffs. Failure to remove tariffs could lead to an all-out trade war and adversely affect market risk sentiment.

In conclusion, demand-driven inflation remains the focal point, with the RBA and the BoJ outliers vis-à-vis investor bets on central bank rate cuts. However, the Chinese economy and trade wars remain another consideration that could affect the FX markets.

Amidst rising bets on a Fed rate cut, monitor real-time data and expert commentary to adjust your trading strategies accordingly. Stay informed with our latest updates and insights to navigate the FX markets effectively.