Following last week’s BoJ decision, this week, the central bank torch will be passed to the BoC and the FOMC. The BoC is expected to deliver its first post-pandemic rate hike this week, and although the Fed is not expected to act at this gathering, we could get clues on how officials are planning to move forward.

Besides those decisions, we also have the preliminary PMIs from the Eurozone, the UK, and the US, as well as inflation data from Australia and New Zealand.

On Monday, the most important releases on the agenda are the preliminary PMIs for January from the Eurozone, the UK, and the US. In the Eurozone, the manufacturing increased and services indice declined somewhat, but stayed within the expansionary territory, dragging the composite PMI down to 52.4 from 53.3.

Eurozone PMIs.

Although this will confirm the view that the ECB may not touch interest rates this year, we don’t expect the euro to fall notably. After all, due to the recent strong acceleration in Covid cases, a small slowdown may not come as a surprise.

In our view, the euro could slide decently only if we see negative surprises below the boom-or-bust zone of 50. This could force those holding bets over a potential hike by the ECB later this year to change their minds.

In the UK, there was a slide in the manufacturing index. The service-sector one slid as well, and the composite was 53.4.

With speculation over another rate hike by the BoE at its upcoming gathering rising notably lately, combined with the acceleration in the CPIs last week, improving PMIs could add more credence to the case and perhaps encourage some GBP buying.

Last but not least, we have the US PMIs, with both the manufacturing and services indices anticipated to have declined somewhat. However, both are expected to stay in the expansionary territory, and with the FOMC decision just two days ahead, we doubt that investors will react to those numbers.

Expectations over a March hike by the Fed and a faster rate path thereafter have soared recently, and thus, market participants may be eager to get more clues on that front from Fed Chair Powell and his colleagues. On Tuesday, during the Asian session, we get Australia’s CPIs for Q4.

The QoQ rate is expected to have risen to +1.0% from +0.8%, something that will drive the YoY rate up to +3.2% from +3.0%. The Trimmed mean and Weighted mean rates are also anticipated to have increased.

Australia CPIs.

Despite the RBA holding the view that interest rates are unlikely to be lifted this year, market participants have a different opinion. According to the ASX 30-day interbank cash rate futures yield curve, they expect the first hike to be delivered in May, while they see the OCR hitting 1.0% by year-end. 

Following Australia’s better-than-expected jobs data last week, accelerating inflation may allow investors to maintain their bets, which could result in another round of buying in the Aussie. However, with the broader sentiment being negative at the moment, due to elevated expectations over a faster rate path by the Fed, we don’t expect a long-lasting recovery in the risk-linked AUD/USD.ASX 30-day interbank cash rate futures yield curve.

Later in the day, the German Ifo survey for January is due to be released, while from the US, we have the CB consumer confidence index for January. With regards to the German survey, the current assessment index is expected to have declined to 96.1 from 96.9, while the business expectations one is forecast to have inched up to 93.0 from 92.6.

This is likely to leave the business climate index unchanged at 94.7. In the US, the CB index is anticipated to have slid somewhat, to 111.8 from 115.8. Wednesday is a central-bank-decision day. First, we have the BoC, and a few hours later, the FOMC.

So, let’s get the ball rolling with the BoC. At its latest meeting, the Bank kept interest rates untouched at 0.25%, and in the statement accompanying the decision, the language was more cautious than previously, with officials expressing concerns over the economic impact of the Omicron coronavirus variant. 

That said, the new strain proved to be milder than initially estimated, which combined with a notable improvement in the Canadian economy and further acceleration in last week’s inflation data, allowed traders to assign a strong chance for a rate increase at this gathering.

Canada CPIs.

Thus, it will be interesting to see whether officials will indeed hit the hike button at this gathering or not. We believe that they can indeed raise rates this week. However, with such an action nearly fully priced in, we don’t believe that the Loonie will gain much on that.

For that to happen, we believe that policymakers will need, not only to hike but to also signal that they are ready to continue with more lift-offs in the months to come.

Now, passing the ball to the FOMC, no action is expected by this Bank, but given the elevated speculation over a rate-hike in March and a faster-than-previously-thought rate path thereafter, we will closely monitor the statement and the press conference by Fed Chair Jerome Powell. 

Following hawkish remarks by several policymakers lately, we do expect a hawkish outcome. However, with such elevated bets over future rate hikes, we see ample room for disappointment.Fed funds futures market expectations over US interest rates.

Anything suggesting that they may not proceed as fast as the market currently anticipates could result in a rebound in equities, and a pullback in the US Dollar and other safe havens. Even if the outlook matches expectations, we could still experience a “sell the rumor, buy the fact” market reaction.

In order for equities to fall notably lower and the dollar to accelerate north in the aftermath of the Fed decision, Powell and his colleagues may need to appear even more aggressive than the current pricing suggests, a case we see as unlikely. According to the Fed funds futures market participants are nearly fully pricing in four hikes by the end of this year, while the latest “dot plot” revealed that the Committee sees three.

On Thursday, during the early Asian morning, we have New Zealand’s CPI for Q4. The QoQ rate is forecast to have declined to +1.3% from +2.2%, but the YoY one is anticipated to have risen by nearly a whole percentage point, to +5.7% from +4.9%. 

Remember that the RBNZ has already raised rates twice in the post-pandemic era, and further acceleration in New Zealand’s CPI will confirm the case for more rate hikes, with the next one most likely to be delivered at the upcoming gathering.

Something like that could benefit the Kiwi, but whether it could hold onto those gains, could depend on the broader market sentiment, and perhaps the outcome of the Fed decision. Let’s not forget that, similarly to the Aussie, the Kiwi is a risk-linked currency as well.

New Zealand CPI.

Later in the day, we have the first estimate of the US GDP for Q4, which is expected to have accelerated to +5.4% QoQ SAAR from +2.3%, confirming the view that the US economy is among the best, if not the best, performing economies in the aftermath of the coronavirus outbreak. 

Conditional upon a hawkish Fed on Wednesday, this could allow market participants to keep elevated their bets over four rate hikes by the end of the year.

Finally, on Friday, Asian time, Japan’s Tokyo CPIs for January are due to be released. As usual, no forecast is available for the headline rate, while the core one is forecast to have slid to +0.3% YoY from +0.5%, underscoring the need for extra-loose monetary policy by the BoJ, even when other major central banks have begun to withdraw support.

Later in the day, we have the US personal income and spending rates for December, alongside the core PCE index for the month, the Fed’s favorite inflation metric. Personal income is expected to have accelerated somewhat, but spending is forecast to have declined. No forecast is available for the core PCE index yet.