The Wait Is On Central Bankers To Shake Data-Resistant Markets

GBP: Services inflation to stay above 6%

The data flow picks up this week in the UK, with labour (Tuesday), CPI (Wednesday) and retail sales (Friday) statistics for the month of December being released. Services inflation is what matters the most for the Bank of England at the current stage and it is expected to see it at 6.1% this week, considerably below the Bank of England's estimates. Despite the improvement in services disinflation, 6%+ remains too high and is unlikely to make the BoE endorse dovish rate expectations just yet.

GBP/EUR can retest the €1.1665 mark, but it may find a bit more support this week as the Euro may benefit from some hawkish comments by Lagarde in Davos. ING Bank's medium-term view on the pair remains bullish.

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EUR: Lagarde may sound more hawkish in Davos

Despite ECB hawks' protests against dovish expectations having had little impact on the market, the WEF event in Davos this week – which sees many ECB speakers including President Christine Lagarde – should not be overlooked. Lagarde has a greater potential to influence markets given a clearly divided Governing Council, and it is suspected that she will opt for a more hawkish tone compared to last week’s comments. There may be some help for the Euro coming from Davos, although we should be wary.

Fed expectations have been resistant to data and the same could hold true for the ECB as well. The minutes from the December policy meeting are also released this week. It still may be premature to assume EUR/USD will be trading sustainably above $1.10.

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USD: Rate expectations still disjointed from data

The first half of January has shown a dislocation between rate expectations and data in the US. The two most important data points for the Federal Reserve, labour and CPI inflation figures, both came in hotter than expected. PPI was a bit softer than consensus on Friday, but that is not enough to justify markets’ reluctance to price out Fed easing.

ING Bank believes the Fed won’t start cutting before May, and that the total easing package will be 150bp. Accordingly, the rally in short-term USD rates appears overdone, and weakness in the front part of the USD curve should support some recovery in the Dollar. However, they suspect that the data may prove insufficient to trigger a USD rebound for now; the consensus view of a Dollar decline later this year seems to be making investors keen to sell Dollar rallies.

Also, the Fed probably needs to send a clearer message that the latest data does not justify the kind of aggressively dovish view embedded in money market pricing. There are a few more Fed speakers lined up this week, but perhaps Dollar bears will want to hear it from Fed Chief Jerome Powell, who is not scheduled to speak until the 31st of January FOMC announcement.

No major data.