Weekly Market Outlook: With financial markets entering a quieter week, all eyes will be on US data as the slumping US dollar awaits the January inflation data to reverse its downward trend. Another highlight will be data on the UK’s GDP growth as the pound lost momentum after the Bank of England’s mixed signals regarding the economy. Analysts and investors are also watching closely the BoE and RBA governors’ speeches for potential hints on interest rates.
US Inflation in the Spotlight again!
US inflation for January is likely to be the most important release of the week. As the US consumer price index is forecasted to rise to four-decade high in January. CPI is expected to have risen by 7.2% in January, a 0.2 percentage point increase from December. The month-on-month rate is expected to rise at the slowest pace in four months, by 0.4%. The core rate, however, should raise eyebrows as it’s expected to jump from 5.5% to 5.9%.
It will take a number of months to determine whether inflation has peaked, so investors will closely examine the report to identify any signs of diminishing price pressures in the CPI components most affected by the pandemic and supply disruptions.
Following policymakers’ assurances that a 50-basis-point rate hike will not occur in March, the dollar index dropped sharply from the 18-month high it reached a week ago. However, a surprise on the upside in inflation numbers could add wind to the dollar’s sails.
Additionally, the University of Michigan will also release its consumer sentiment data for February this Friday, and it is widely expected to rebound after being depressed by the Omicron wave in January, but any continued weakness should raise concerns over the economy’s health.
BoC Governor Macklem Speech
Tiff Macklem, the Governor of the Bank of Canada (BoC) in the spotlight among market participants and analysts, as his speech reflects the official BoC position on the future course of monetary policy and interest rates.
As long as Tiff Macklem describes the country’s labour market positively or states inflationary growth, the national currency (CAD) can be viewed positively.
BoE Governor Bailey Speaks
With the second-rate hike in a row in February, the Bank of England (BOE) maintained its advantage over other major central banks by being the least behind the curve for inflation.
Andrew Bailey, Governor of the Bank of England (BOE), is likely to speak this Friday. Having been the chairman of the BOE’s Monetary Policy Committee (MPC), Bailey has more influence on sterling’s value than any other person. Market participants closely follow his public engagements for clues about the future monetary policy. His statements may spark a short-term upward or downward trend.
Although Governor Andrew Bailey has a hawkish stance, he pointed out some downside risks to upwardly revised inflation forecasts, casting doubt over the rating outlook even as he indicated more rate hikes to come. Data due on Friday will likely show that the UK economy regained all the lost output during the pandemic. The economy is expected to have expanded by 1.1% quarter-on-quarter, the same rate as in Q4 2021.
RBA Governor Lowe Speaks as AUD/USD Drops
The Australian central bank ended its bond purchase program and left key lending rates unchanged. The Reserve Bank of Australia’s policy board led by Governor Philip Lowe decided to cease any further purchases under the bond purchase program effective February 10. At the same time, the board decided to maintain its cash rate at 0.10%, a record low.
According to the governor, ceasing purchases under the bond purchase program does not imply a rise in interest rates in the near term. In his opinion, the bank will not raise the cash rate until inflation is sustainably within its 2 to 3% target range. Although inflation has picked up, it is still too early to conclude that it will remain sustainably within the target band. Immediate after the RBA announcements, the AUD/USD dropped 0.5% but is still above a recent 18-month trough of $0.6967. The current price of the pair stands at 0.70666.
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