Week Ahead: ECB, UK data and dollar decline in focus

Falling US inflation has set the scene for a Fed September rate cut. Markets are now fully priced in for that, with a soft landing apparently delivered. History tells us that in itself is an impressive feat, with currently little evidence of major recessionary headwinds. It also means the dollar took a hit after the CPI release, which was exacerbated by Japanese FX intervention that propped up the yen. Going into this week, we will be watching the 10-year Treasury yield and so the greenback too for any follow-though selling, as they both teeter on support. Japanese intervention will also be interesting, as it could be entering a new phase with the authorities selling pre-FOMC and post-CPI, and not due to any ramp up in volatility and speed of currency moves.

The ECB meeting could be a bit of a nothingburger “summer” meeting with the following September rendezvous far more important. Quarterly staff economic staff projections will be published then, and the ECB appear to be relatively confident in their future inflation forecasts. Services inflation remains sticky with core inflation too high for any near-term policy action. EUR/USD is close to the June highs at 1.0916, with the bulls eyeing up the March top at 1.0981.

It’s the middle of the month so that generally means a week full of UK data. We’ve been starved of comments from BoE officials recently due to the UK election, but last week seemed to pour coldish water on an August rate cut from various MPC members. CPI and wage growth figures are still the most important data points and risk events for the pound. Cable has had two strong weeks of gains and taken the manor into overbought territory. EUR/GBP has taken out the June low and the August 2022 low at 0.8339 on the bear’s radar.

In Brief: major data releases of the week

Monday, 15 July 2024

–  China Plenum and data: The third plenum of the CCP’s 20^th National Congress will be watched for policy communication and signals. Data, including Q2 GDP, Retail Sales, Industrial Production and Fixed Asset Investment is expected to fall. Housing continues to weigh on activity.

Tuesday, 16 July 2024

–  Canada CPI: The May data printed hotter than forecast but the core measures remained in the BoC’s target band of 1% to 3%. A rising jobless rate and weak recent labour market figures see a high chance (70%+) of another rate cut next week.

–  US Retail Sales: The headline number is seen flat in June after printing at 0.1% in May. Softer consumer confidence, along with lower gasoline prices and sliding auto sales point to downside risks. 

Wednesday, 17 July 2024

– UK CPI: The headline and core prints are seen unchanged at 2% and 3.5%, respectively. The all-important services inflation is expected to tick one-tenth lower to 5.6%, above the MPC’s forecast of 5.1%. August rate cut odds currently sit around a coin toss. 

Thursday, 18 July 2024

– UK Jobs: The unemployment rate is forecast to hold steady at 4.4%. The focus will again be on the wages data with the ex-bonus metric likely to ease to 5.7% from 5.9%. The MPC hawks will be eyeing this figure which they say is some way off being consistent with the CPI target.

– ECB Meeting: No rate cut is expected but the Governing Council may pave the way for a September move, albeit by being data dependent. Will there be pushback against a “normal” easing cycle? Current market pricing sees an 80% chance of a September reduction.

Friday, 19 July 2024

– Japan CPI: Inflation could edge one-tenth higher to 2.9%, as suggested by Tokyo inflation and producer prices. Any signs of a wage-price spiral will be watched by the BoJ.

– UK Retail Sales: Expectations are for the headline to rise 0.2% m/m, lower than the prior 1.3%. Cooler weather is likely to have crimped sales activity and in-store spending.