The next big event that has the potential to shake up the bets of the Federal Reserve is the US Inflation numbers. Pound traders are focusing on the Consumer Price Index (CPI) after the Bank of England’s hawkish hold. Additionally, Aussie traders are awaiting the jobs report and Chinese data, and Japan’s GDP is also on tap. Can the US CPIs convince investors that one more Fed hike is imminent?
Following a significant hit last Friday due to the disappointing US employment report, the dollar has staged a hesitant recovery this week. Several Fed officials have pointed out that the strong performance of the US economy leaves the door open to further rate increases. However, despite the dollar’s recovery, there is little investor confidence in the possibility of another hike. According to Fed funds futures, there is only a 20% probability for a last quarter-point increase by January, while rate cuts are being priced in at around 80 basis points by next year’s end.
Market participants may be expecting inflation to pull back again, particularly after the retreat in oil prices during October, and a potential economic weakening going forward. The US CPI data for October on Tuesday is likely to be a focal point, with expectations for the headline rate to have pulled back to 3.3% year-on-year from 3.7%, and the core rate to have ticked down to 4.0% year-on-year from 4.1%. However, with softer PMIs for October suggesting weakening price pressures, there may be a downside risk. Additionally, with the year-on-year change in oil prices turning negative, headline inflation could continue to soften into year-end, further solidifying investors’ belief in no more rate hikes.
In the UK, inflation data is also anticipated next week, with the headline CPI rate expected to drop to 4.9% year-on-year from 6.7%. The release of employment report data for September on Tuesday may also provide insight into where inflation may be headed in upcoming months.
For the Aussie, the release of employment numbers for October on Thursday may provide clarity. Additionally, China’s industrial production, retail sales, and fixed asset investment numbers for October on Wednesday could have an impact on the currency. Japan’s preliminary GDP for Q3 is also anticipated to be released on Wednesday, with expectations of a contraction, marking the first in four quarters. This could prove to be a challenge for the Bank of Japan’s plans and prompt traders to push the yen lower.
