The CPI reports in the US and UK will be the focus this week. We see a higher risk of a lower-than-expected figure in the US, although our estimates are in line with consensus, while services inflation and wage growth in the UK should remain sticky. The country faces some downside risks this week, but volatility should remain limited
USA: waiting for the inflation catalyst
The US Dollar Index has retreated modestly over the past week after trading at its 2024 high. Reassessing rate expectations following strong US payroll numbers has offered some continued support on the dollar's declines. : This week, the US release (tomorrow) may be the new catalyst for further positioning changes in the exchange rate.
Our economic team's estimates are aligned with the consensus of a monthly underlying figure of 0.3%, but we believe the risks are more skewed towards a figure of 0.2% than 0.4%. Consequently, there are some downside risks to the dollar, although our base case is that a consensus print will leave few traces on the currency market. Ultimately, investors may have to look elsewhere to fine-tune interest rate expectations from the Federal Reserve, which currently expects a first cut in June. A weekly retail sales release on Thursday may renew expectations of a rate cut in May and push the dollar lower.
That said, the evidence on the labor market and the lack of faster disinflation should still be enough to discourage aggressive dollar selling. We remain pleased with our call for greater dollar resilience in the first quarter, before a clearer bearish trend emerges from the second quarter.
Today, the US calendar is quiet on the data front. On the Federal Reserve front, there are speeches from Michelle Bowman, Thomas Barkin and Neel Kashkari.
EUR: Divergent comments from the ECB
The number of comments from European Central Bank (ECB) officials has intensified in recent days, as has the divergence in opinions expressed by different members. Fabio Panetta, the most moderate voice in the Governing Council, backed expectations for rate cuts and said the time for monetary easing is “fast approaching.” Unsurprisingly, this differs from the latest comments from Isabel Schnabel (a hawk), who warned against cuts too soon, but also from more moderate members such as Mario Centeno and Pablo Hernández de Cos, who still seem to prefer caution over moderate orientation.
Despite some expressions of discontent from doves like Panetta, the consensus among policymakers seems to be in favor of maintaining rates at least until the European wage statistics in April. June looks increasingly likely as the start date for monetary easing, and markets are also accepting this view with growing confidence. We agree with a cut in June, but we still think that markets are overestimating the ECB's easing cycle by about 40 basis points for December. In contrast, markets are pricing 125 bps of Fed cuts in 2024 looking too conservative (we expect 150 bps). The convergence of US and Eurozone rates will, in our view, be the biggest driver of a EUR/USD rally later in the year.
However, in line with our view of the dollar, the holding pattern that EUR/USD has shown recently could remain the norm in the coming weeks. The US CPI will be the highlight for the pair this week, while the main release on the eurozone calendar will be tomorrow's ZEW survey in Germany. We see some modest downside risks to the dollar this week and think EUR/USD can find some support above 1.0800, although a return to the 1.093/1.0950 area seems premature. On behalf of the ECB, stay tuned for Philip Lane's speech today.
GBP: Week full of data
The second-best performing currency after the 2024 dollar, the pound, is about to face a couple of key data tests this week. January employment data will be released tomorrow and Thursday's CPI report and GDP data will be released on Wednesday.
Our economic team believes that both wage growth and services inflation will remain sticky in the first quarter, meaning the Bank of England will be in no rush to adopt more dovish communication in the near future. Markets expect the Bank of England to act with a delay (in August) compared to the ECB and Federal Reserve easing cycles. We agree, but we also foresee cuts of 100 basis points (versus the expected 80 basis points) by the end of the year.
Therefore, our base case is some weakness against the Euro going forward, but the near-term outlook remains quite constructive for the Pound.
ECO: GDP and CPI Week in the Region
We are looking forward to another busy week in the Central and Eastern Europe region. Today's calendar is basically empty but it will be more interesting in the coming days. Tomorrow we will see the decision of the National Bank of Romania, according to which we expect rates to remain unchanged.
Then the current account for December will be published in Poland, the Czech Republic and Romania. On Wednesday we will see fourth quarter GDP in Poland, Hungary and Romania and industrial production in Romania. On Thursday, January inflation will be published in Poland and the Czech Republic. In both cases we expect a result below market expectations. And on Friday, the Czech National Bank will publish the minutes of its February meeting, when it cut rates by 50 basis points to 6.25%. As always, you can find all the numbers in our latest article next week.
Our pick from last week was higher, hitting 90.00 for the first time on Friday. Still, PLN remains our favorite in the region due to aggressive support from the central bank and payers in the rates market. On the other hand, positioning is clearly an issue holding back further gains. Therefore, our scenario for this week is a slow move to 4.30.
On the other hand, it is rising as the market puts bets of 100 basis point rate cuts back on the table. Therefore, we see a fairly wide range for these days of 386-390. has jumped to 25.20, the highest level since early 2022, following the CNB rate cut by 50 basis points. We expect some downward pressure on rates to persist in the market this week, especially given Thursday's inflation number. Therefore, EUR/CZK could test the 25.30 level. However, after that we believe that market prices will reach a limit and it makes sense for us to think about softening this movement in EUR/CZK.
Disclaimer: This publication has been prepared by ING for informational purposes only, without regard to the means, financial situation or investment objectives of a particular user. The information does not constitute an investment recommendation, nor is it legal or tax investment advice, nor an offer or solicitation to buy or sell any financial instrument. Read more