Week ahead: Inflation and growth data in focus

It’s Friday and we open next week’s calendar and have a peek. We make a start on Monday with the release of Germany’s Ifo indicators for February and Euro Zone’s final HICP rate for January. On Tuesday, we get UK’s CBI indicator for distributive trades and the US consumer confidence, both being for February, while on Wednesday we get Australia’s CPI rates for January. On Thursday we get Australia’s capital expenditure for Q4, Switzerland’s GDP rate for Q4, Euro Zone economic sentiment for February, Canada’s business barometer also for February, the US durable goods orders growth rate for January, the revised US GDP rate for Q4 24, the weekly US initial jobless claims figure and from Canada the current account balance for Q4. On a packed Friday, we get from Japan February’s Tokyo CPI rates and the preliminary industrial output for January, UK’s Nationwide house prices for February, Sweden’s final GDP rate for Q4, France’s final GDP rate for Q4, Switzerland’s KOF indicator for February, the Czech Republic’s final GDP rate for Q4, Germany’s final HICP rate for February, Germany’s preliminary HICP rate for February, the US headline and core PCE rates for January and Canada’s GDP rate for Q4.      

USD – Revised GDP and January’s PCE rates in focus  

On a fundamental level, we note Trump’s intentions to impose 25% tariffs on US imports of cars, pharmaceuticals and chips further enhancing the uncertainty about the global outlook. Furthermore,  the negotiations with Russia are ongoing while the US Government seems to be throwing its former allies, Zelenskyi and the EU, under the bus and it would seem as if Russia and the US are re-distributing the world. At the same time he also stated that a trade deal with China is possible which tended to ease market worries. Overall the US and international fundamentals are very fluid and seem to continue to blur the past modus vivendi in international politics, which in turn may support the USD.

On the monetary front we note that the Fed’s January meeting minutes tended to highlight the bank’s worries for the possible inflationary effect of Trump’s policies, on the US economy. The minutes tended to serve mostly as a signal of hesitation on behalf of the bank to proceed with lowering its interest rates. Any signals from Fed policymakers in the coming week, enhancing market expectations for the Fed to delay any rate cut could also be supportive for the USD.

As for financial data coming up, we note the release of the revised GDP rate for Q4, on Thursday and a possible acceleration if compared to the preliminary release, could support the USD. Also on Friday we get the PCE rates for January and a possible acceleration of the rates could enhance the market’s expectations for a more hawkish Fed and thus could support the USD.  

Analyst’s opinion (USD)

The USD’s weakening seems to be ongoing hitting he lowest point since the start of the year. Yet the release of the PCE and GDP rates may prove to be tipping points should they slow down, while the unpredictability of the US President could reverse the fundamentals at any moment. Overall we see the case for the USD to gain some ground under three key circumstances, a)should Trump intensify the uncertainty in the markets, b) if the Fed turns more hawkish, c) if financial data turn more positive than expected.

GBP – Fundamentals to lead the Pound

On a macroeconomic level, the tight employment market in the UK as implied by December’s stellar rise of the employment change figure, the failure of the unemployment rate to tick up and the beyond expectations acceleration of the average earnings growth rate shook the markets. If December’s employment data is combined with the acceleration of the CPI rates both on a core and headline level, for January, then one could expect increased pressure being exercised on the Bank of England to readjust its dovish intentions. In the coming week, only a few notable financial data are to be released, hence we expect fundamentals to lead the way for the pound.

On a monetary level, we note the dovish intentions of BoE as expressed in last week’s report, given the latest interest rate decision of the bank to cut rates. It’s characteristic that BoE Governor Bailey downplayed the relative tightness of the UK employment market as he stated that the rates and figures were in line with the bank’s forecasts. Furthermore we may see the acceleration of the CPI rates leaving BoE unconvinced as inflation in the services sector, which is a key sector for the bank, rebounded less than what the bank expected. Furthermore, the bank’s worries may still be present for growth in the UK economy which may allow its predisposition to continue easing its monetary policy to continue. Hence it may prove to be business as usual for Bank of England and we expect the bank to maintain its dovish intentions, which in turn may weigh on the pound.

On a political level, we note the continuance of the weakening of the Labour party, which highlights the detrimental effect of the party being in Government, yet we still see the UK Government as stable. On the other hand, one has to note the failure of the Conservatives to benefit from the weakening of the Labour party, while the winner for the time being seems to be the right wing populist Reform Party.    

Analyst’s opinion (GBP)

Given the absence of high impact financial releases from the UK and the relative stability of the UK Government, we highlight monetary policy as the main driver for the pound in the coming week. There are a number of BoE policymakers scheduled to speak next week and should they enhance the market expectations for a dovish BoE, we may see the pound retreating.

JPY – BoJ’s hawkishness supports the Yen

JPY seems about to end the week in the greens against the USD, EUR and GBP in a sign of a wider strength for the Japanese currency. The reason behind JPY’s strengthening seems to be the market expectations for BoJ to remain hawkish. For the time being we note that currently the market expects the bank to deliver another rate hike until the end of the year, probably in early July.   It should be noted that BoJ’s Governor Ueda met Japan’s PM Ishiba on Thursday discussing the path of the Japanese economy and the issue of the recent rate hikes was not discussed. The fact that the rate hikes were not discussed allowed for the impression that they may have been sanctioned by the Japanese Government, something that could imply that the bank has a free road ahead for more rate hikes. Overall should we signs confirming or even enhancing the market’s expectations for a tighter monetary level by the BoJ we may see the Yen getting some support.

On a fundamental level we highlight JPY’s safe haven qualities as a possible factor affecting JPY’s direction in the coming week. Should we see market worries easing over the coming week we may see JPY losing some ground, while should uncertainty be enhanced, we may see JPY gaining.

On a macroeconomic level, we note the acceleration of Japan’s CPI rates for January corroborating BoJ’s narrative and the preliminary PMI figures of February during today’s Asian session. Yet the big surprise may have been the release of the GDP Rate for Q4 on Monday, as the rate surpassed market expectations by accelerating to 2.8%qoq on an annualised basis. The acceleration of the GDP Rate tends to lift a burden from the backs of BoJ allowing the bank to maintain a firm stance as the Japanese economy grows with a substantial pace. In the coming week we note the release of Tokyo’s CPI rates for February, as the megacity, given the density of its populations tends to act as a barometer for inflationary pressures for the whole nation. 

Analyst’s opinion (JPY)

We note BoJ’s intentions as possibly the key factor behind JPY’s direction in the coming week and possibly the Yen could get some support, should the market’s expectations for a tighter monetary policy by the BoJ be enhanced.

EUR – German elections could shake the Euro

On a fundamental level for the EUR we highlight the German elections on Sunday. The conservative party CDU is expected to come in first with around 30% and the AfD, the far-right party to come in second with 20%. The problem of the German elections is that for a government to be formed coalition of parties is required, hence the market’s worries for a possible inclusion of AfD in a possible Government with the CDU as junior partner. Despite all the other parties forming a “firewall” by stating that none of them would form a coalition with AfD, there is some degree of uncertainty, given that the stakes are high. In any case we expect that the result of the elections could lead to prolonged period of political uncertainty as a period will be needed for German parties to discuss and find common ground in order to from a new coalition government. Should the percentage of AFD come in higher than expected and show that forming a government without it is difficult expected the result to weigh on the EUR and vice versa, should there be increased signs of forming a stable government with relative ease, we may see the EUR getting some support. Other than that the US-Russian negotiations are ongoing and the fact that Europe was not included, tends to underscore the weakness of Europe on a geostrategic level which also may reflect bad on investor morale. 

On a monetary level, we note ECB’s dovish intentions are possibly weighing on the EUR. Yet at this point we note ECB board member Schnabel’s comment that a rate cut pause is nearing which may have sounded a bit hawkish. Please note that Ms. Schnabel is scheduled to speak on Tuesday and could reach the headlines should she reiterate if not intensify such hawkish comments. Also we note a relatively annoying resilience of inflationary pressures in the Euro Zone as a whole which is expected to be confirmed on Monday with January’s final HICP rate. In general though we tend to view ECB’s intentions continuing to weigh on the EUR for the time being.

On a macroeconomic level, we note the improvement of the preliminary PMI figures for France, Germany and the Euro Zone as a whole, maybe with one exception being the services sector. The data tend to imply an improvement of economic activity, yet key sectors like Germany’s manufacturing sector showed another contraction, albeit narrower. Also the intentions of US President Trump to impose tariffs on EU products entering US soil, tends to deepen market worries for Euro Zone’s macroeconomic outlook. Overall we still see the economic outlook of the Euro Zone as bleak, with growth being anemic for the Euro Zone and the specter of a possible recession looming over trading bloc. It’s going to be interesting to see what February’s Ifo indicators will be implying for the actual conditions on the ground of the German economy as well as the business expectations.  

Analyst’s opinion (EUR)

The EUR seems to have lost its charm in the past few days and we tend to expect the common currency to lose further ground in the coming week. Key factors to keep an eye out are the elections in Germany, the peace process in Ukraine and the financial data ahead with Germany’s and France’s preliminary HICP rates for February standing out. A possible resilience of inflationary pressures in the prementioned countries could provide some support for the EUR as it would act as a prelude for the Euro Zone as a whole.

AUD – CPI rates and Trump could move the Aussie

On a monetary level, in the land of down under, RBA cut rates as expected by 25 basis points with AUD getting some slight support upon release in Tuesday’s Asian session. In its accompanying statement the bank highlighted the uncertain outlook and its resoluteness to bring inflation sustainably to target, being the main priority of the bank. In her following press conference, RBA Governor Bullock mentioned that the bank cannot declare victory on inflation yet also noted that monetary policy is still in restrictive territory. Overall, the bank sent out some mixed signals for its intentions possibly blurring the picture in an effort to keep its options open.

On a fundamental level, we highlight US President Trump’s intentions to impose additional tariffs as mentioned in the USD paragraph, yet the main event for Aussie traders may have been Trump’s statement that a US-Sino trade deal is possible. Should market expectations for such a possibility be enhanced in the coming week, we may see the Aussie getting some support, given the close Sino-Australian economic ties.

On a macroeconomic level we note the release of Australia’s employment data for January. The release showed a tighter than expected Australian employment market as employment change figure dropped less than expected. Hence with a relatively tighter than expected employment market for January and given RBA’s focus on inflation, as per its latest interest decision, we shift our attention to the release of Australia’s CPI rates for January next Wednesday. Should the rates show a resilience of inflationary pressures in the Australian economy we may see the pressure on RBA to keep rates unchanged for a longer period intensifying and thus providing some support for AUD, while should the rates slow down implying easing inflationary pressures, AUD could be on the retreat.

Analyst’s opinion (AUD)  

In the coming week we expect the highlight for Aussie traders to be the release of January’s CPI rates on Wednesday. A possible acceleration of the rates could provide some support for the Aussie yet on a fundamental level the US-Sino relationships are key to AUD’s direction, simmering under the surface.

CAD – Fundamentals to lead the Loonie

The strenghtening of the CAD against the USD over the past two weeks seems  to have hit a halt this week. On a fundamental level, the Trump’s threat to impose additional 25% tariffs on cars, pharmaceuticals and chips, seems to have weighed on the Loonie. Overall the situation tends to weigh on the CAD. On the flip side the recent rise of Canadian bond yields tends to be supportive for the Loonie. Furthermore we note the rise of WTI’s price over the past consecutive four days tends to be supportive for the CAD, should it be extended in the coming week.  

On a  macroeconomic level, we highlight the acceleration of January’s CPI rates on a headline and especially on a core level. The release highlighted the resilience of inflationary pressures in the Canadian economy, strengthening the CAD against the USD upon release. In the coming week, we have a rather light calendar as for financial releases from Canada, hence Loonie traders may turn their attention towards fundamentals.

On a monetary level that the acceleration of the CPI rate for January may be exercising pressure to readjust its dovish stance. It’s characteristic that CAD OIS implied that after the release the possibility of a rate cut in the bank’s March meeting have dropped to 31%. The expectations for a rate cut are now for the April meeting, with the markets expecting that it would be also the last rate cut for the year. Overall we may see the market’s expectations for the BoC’s intentions shifting ina more hawkish area, yet in today’s American session BoC Governor Tiff Macklem is scheduledto speak and could shed more light on the bank’s intentions. 

Analyst’s opinion (CAD)

We see the case for Loonie to be entering a make or break position, as fundamentals surrounding it keep shifting. We highlight US President’s Trump’s unpredictable nature as a source of risk for the Loonie, while on the other hand a possible shift of market expectations for BoC towards a more hawkish tone, could provide some support for the CAD, as could also a continuance in the increase of oil prices. 

General comment

As a closing comment, we expect the influence of the USD in the FX market to remain unchanged in the coming week, maybe increase a bit as the release of the US PCE rates for January approaches next Friday. Yet given the unpredictability of US President Trump we expect US fundamentals to keep traders on the toes. US stockmarkets  remained in a sideways motion over the past week as the intentions of US President Trump seem to maintain the uncertainty among US equity market participants. Overall US President Trump’s intentions about placing tariffs and immigration policy tend to place a shadow over the US economic outlook and thus cause worries, especially for the demand side of the US economy. It’s characteristic how major US stockmarket indexes fell on Thursday’s opening. As for gold’s price, the upward motion seems to be unstoppable as the precious metal’s price is constantly reaching new record highs and is about to end the week in the greens for an eighth consecutive time, driven mostly by safe haven inflows.