The Week Ahead: US Inflation, Services PMIs, and the Bank of Canada in Focus

The US Dollar

On Wednesday, July 24, US private sector PMI numbers will impact buyer demand for the US dollar. The services PMI will influence the US dollar more, contributing over 70% to the US economy.

Slower service sector growth could signal weaker economic growth in Q3 2024, supporting a more dovish Fed rate path. However, investors should also consider input and output price trends. The services sector is a major contributor to headline inflation. Softer input and output prices could further raise investor bets on multiple 2024 Fed rate cuts.

US labor market and Q2 GDP numbers also require consideration on Thursday, July 25. A pickup in economic growth could ease investor fears of a hard landing. However, US jobless claims data will influence sentiment toward the Fed rate path.

Weaker labor market conditions could affect wage growth and reduce disposable income. Falling disposable income may curb consumer spending and dampen demand-driven inflation.

On Friday, July 26, the US Personal Income and Outlays Report will be crucial. Lower inflation could fuel speculation about a July Fed rate cut. If inflation continues to trend lower, the Fed could also cut rates in September and December.

There will be no Fed speeches to consider, with the Fed entering the blackout period on July 20.

The EUR

On Wednesday, Euro area Services PMI numbers will influence sentiment toward the EUR/USD and the ECB rate path.

An unexpected fall in the Eurozone Services PMI may support investor bets on a September ECB rate cut. The services sector contributes over 60% to the Eurozone economy. Weaker sector activity could raise concerns about a Eurozone economic recession and support an ECB rate cut.

However, investors must consider the sub-components, including prices. Higher input and output price trends would reduce expectations of a September ECB rate cut. The ECB is concerned more about inflation than the economy.

During the ECB press conference on Thursday, July 18, ECB President Lagarde said the ECB was data-dependent.

German business sentiment will be in the focus on Thursday. Weaker sentiment toward the German economy could raise investor bets on a September ECB rate cut. Softer business confidence could affect job creation, wage growth, and consumer spending. Downward trends in consumer spending may dampen demand-driven inflation.

With a busy economic calendar, investors should monitor ECB commentary. ECB President Christine Lagarde (Thurs) and Chief Economist Philip Lane (Tues/Wed) are on the calendar to speak. On Friday, the ECB will also release its Consumer Expectations Survey. Consumer views on inflation could be pivotal.

The Pound

On Wednesday, UK Services PMI numbers could affect the Pound and the Bank of England rate path.

The services sector contributes over 70% to the UK economy. Additionally, the services sector remains a main contributor to headline inflation. A pickup in service sector activity could dent investor hopes of an August BoE rate cut.

However, investors should consider input and output price trends. Higher input prices could reduce investor expectations of an August BoE rate cut. Higher wages could increase consumer spending and demand-driven inflation.

With the UK services sector in focus, investors should monitor BoE commentary for views on interest rate cuts.

The Loonie

On Wednesday, the Bank of Canada (BoC) will put the Loonie in the spotlight. The consensus is for the BoC to hold interest rates at 4.75%. However, a Reuters poll showed most economists predicted a 25 basis point rate cut.

A 25-basis point interest rate cut and hints of more interest rate cuts in October and December could impact buyer demand for the Canadian dollar.

Interest rate differentials would favor the US dollar if the BoC cuts interest rates and signals two more rate cuts.

Economic data from Canada, including house prices and wholesale sales data, will play second fiddle to the BoC decision.

The Australian Dollar

On Wednesday, the Services PMI will influence buyer appetite for the Aussie dollar. A marked fall in the Services PMI could reverse investor bets on a Q3 2024 RBA rate hike. The services sector, contributing over 70% to the Australian economy, is also a major contributor to headline inflation.

Weaker sector activity and softer price pressures may ease demand-driven inflation, allowing the RBA to leave the cash rate unchanged.

The Japanese Yen

On Wednesday, Service PMI numbers for July will impact near-term Japanese Yen trends. The Bank of Japan wants the services sector to fuel demand-driven inflation. An expansion across the services sector could increase investor expectations of a July BoJ rate hike.

However, investors should consider the sub-components, including input prices and employment. Weaker job creation and input price trends could signal a low-demand environment and a softer inflation outlook. A softer inflation outlook may temper bets on a July BoJ rate hike.

On Friday, Tokyo inflation figures from July could be pivotal to a BoJ rate hike. Higher core inflation could allow the BoJ to raise interest rates to restore price stability and bolster the weak Japanese Yen.

Beyond the numbers, monitor the Japanese government and BoJ-related commentary on Yen’s weakness and monetary policy.

Out of China

On Monday, the People’s Bank of China will set the one-year and five-year loan prime rates (LPR). After weaker-than-expected Q2 GDP numbers, unexpected cuts to the LPRs could drive demand for riskier assets.

Lower Bank lending rates could increase credit demand and consumption, possibly strengthening the Chinese economy.