Will slower consumption affect this week’s Fed’s decision
Friday brought weaker consumer spending data in the form of the PCA index. Coming just a few days ahead of The Federal Reserve’s interest rate decision, this data could be even more influential than usual. Most believe the Fed will lift their base rate but may signal a slower pace of hikes in future meetings. If they do, then we ought to see a little USD weakness in the latter part of the week. If they don’t, then the opposite will be true. The US currency starts the week at just below $1.24 against the pound and back below $1.09 against the euro. There really isn’t a lot of US data for traders to look at before Wednesday, so sideways trading is the order of business for the last coupe of days of January. However, the Fed’s decision is followed by the US Employment Report on Friday, so it will be a lively start to February.
GDP and rate decision for the eurozone this week
The Jan to Feb transition for the eurozone is blanketed by eurozone economic growth data, consumer price inflation data and a European Central Bank interest rate decision. The headlines are that the markets are expecting a GDP contraction in Q4; a small drop of 0.1% or thereabouts but a drop nonetheless. Inflation is expected to remain elevated at 9.0% or similar and this is the encapsulation of the dilemma for the ECB. A contracting economy but belligerently high inflation makes it hard for a central bank to hike interest rates without damaging growth but also hard to leave interest rates low for fear of fuelling inflation. As with the Fed, there is a very good chance they will hike by 650 basis points or maybe just 25BP but signal they are nearing the end of their interest rate normalisation process. For now, the GBPEUR rate is bck above €1.14 but only just and the EURUSD rate is back below $1.09 but not by much.
BOE rate hike widely expected
There is very little happening on the UK data front this week but we do have a Bank of England interest rate decision on Thursday. The markets have factored in a 50 basis point interest rate hike, which would bring the UK base rate up to 4%; the highest it has been since 2008, the year of the global financial crash. Assuming the bank does follow the script, the next big question is, where next? As with all central banks, the dichotomy between killing growth or fuelling inflation is the main talking point when the board meets. This meeting will be no exception and the statement that is issued alongside the interest rate decision will be the most important factor for the value of sterling as we head into February. The pound starts the week looking fairly robust at USD 1.24 and EUR 1.14 but we are only seeing stable rates against the likes of the New Zealand dollar (1.91) and the Australian dollar (1.7480). If the BOE turns more dovish or fails to throw in the 50 BP hike, sterling is going to fall, of that there is little doubt.
