Week Ahead: Eyes on the BoJ, UK and US inflation data

Markets continued repricing their expectations for rate cuts by the Fed next year after the FOMC meeting and Chair Powell press conference last week. The dovish pivot by the world’s most important central bank could be instrumental in driving price action over the next few months. US short-term rates are expected to fall below 4% next year from the current 5.25% – 5.50%, and this has given a strong bid into the holiday period to the benchmark S&P 500 index which is now closing in on its all—time highs.

Consensus sees the first Fed rate cut in March, though it’s worth pointing out that the recent easing in financial conditions poses upside risks to inflation in 2024. Recent data also remains relatively solid with the jobs market tight, core inflation still double the Fed’s target at 4% and retail sales surprisingly firm last month. The central bank’s favoured measure of inflation – the core personal consumer expenditure deflator – is released on Friday and is expected to be more benign than the core CPI print. A big miss could encourage more selling in the dollar and buying of stocks as investors gear up for a Santa rally between Christmas and the new year.

The Bank of Japan meets on Tuesday amid much speculation about whether policymakers in Tokyo will tighten policies. Markets have been left disappointed for some time now about the BoJ not moving faster in stopping their current ultra-accommodative stance. The emphasis the bank puts on wage growth will be key with the spring wage negotiations seemingly important in determining any shift in policy. National CPIs have continued to accelerate which could lift the likelihood for businesses and labour unions to agree on another round of pay hikes. Hints around any policy tweak and exit from negative territory this week could be seized upon by traders who are waiting to hit the sell button on USD//JPY again. 

UK inflation will be eagerly watched by GBP investors after the Bank of England railed against rate cuts in 2024. But markets looked through this and homed in on the global policy easing theme with four cuts now priced into next year in the UK. The headline CPI rate is forecast to edge lower again, with services inflation the key metric and cited by the BoE last week as an important input into the bank’s decision-making process. Cable closed off its highs from last week and below 1.27 on Friday’s sell-off. The data plus central bank speakers on both sides of the Atlantic will drive price action going forward. 

In Brief: major data releases of the week

18 December 2023, Monday

-German IFO Business Sentiment: Morale among the eurozone’s biggest economy edged up for the first time in six months in October. But the mood remained subdued and a second recession inside a year is still seen as likely. Elevated interest rates are still expected to weigh on economic activity next year. EUR/USD struggled again just above 1.10 so this is firm resistance.

19 December 2023, Tuesday

-RBA Minutes: This meeting saw rates left unchanged after a hike the previous meeting. Markets were positioned for a hawkish hold, but the RBA appeared to take a more data dependent stance. Is a further hike still on the table? The aussie is performing well in the current environment. Near-term resistance sits at 0.6728.

–Bank of Japan Meeting: The BoJ is expected to maintain all current settings after much speculation of a shift to its ultra-easy policies. The tone and language about the future outlook will be key for markets, who are looking for changes in the new year. USD/JPY has dropped for five straight weeks after peaking at 151.90. The 200-day SMA is at 142.50 with downside towards 140 eyes if the bearish momentum continues.

21 December 2023, Thursday

–UK CPI: Expectations are for the headline to ease to 4.4% y/y from 4.6% and the core to slip to 5.5% from 5.7%. Cooling energy and food price inflation will again help contribute to declines. The first BoE rate cut is seen in May. GBP/USD has near-term resistance at 1.2791/94 and support at 1.2589.

22 December 2023, Friday

–UK Retail Sales: Weak sentiment and high interest rates means activity may be softer in the lead up to the holiday season as consumers held back on Christmas spending. That said, Black Friday sales could be more attractive.

–US Core PCE Deflator: Analysts expect to see PCE inflation cooling further in November after similar outcomes in the CPI and PPI data. The annual print is forecast to drop closer to 3%. This means the six-month annualised rate could drop below the Fed’s 2% target. 

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