Important macro data ahead of central bank decisions

The dollar gained and the Wall Street indexes lost - this is the picture of the market 2 days before the Federal Reserve decision on interest rates. This week is just getting started. From a macro perspective, today will look more generous compared to Monday - mainly due to Europe.

The ECB will take these data into account

France will show inflation results for January. Today's reading for Germany postponed for technical reasons. We will also find out at what pace the euro zone developed in the fourth quarter of last year. Tomorrow, in turn, the HICP index for the entire economic area will be presented. It's definitely data he'll pay attention to EBC, which will decide on its monetary policy on Thursday.

For the moment the market is counting on a move of 50 basis points up from Lagarde and 25 from Powell. At least that's what market valuations based on futures contracts indicate. We should not expect any major surprises at the moment. Perhaps such will appear, but only in March, when we will receive further portions of macro data. If they were to deteriorate significantly, then the "doves" from the ECB would start to give a stronger signal about their existence.

Of course, the lack of major surprises does not mean that there will be no volatility in the currency market. It may appear today during the publication of inflation data from the largest European economies. Tomorrow, bigger moves may occur when the HICP index for the whole euro zone is released.

New "price brakes"

Inflation data will have many statistical effects So you can expect some big surprises. Since January, the new weight of the basket of goods has been in force. They are to reflect changes in the structure of consumption in the previous year. Let us remember that after the lifting of pandemic restrictions, the demand for services has increased significantly. Their weight will be much higher this year compared to 2022. Recently, the government's actions aimed at mitigating the impact of higher energy prices had a significant impact on inflation. In Germany, the government took over monthly payments for natural gas and district heating in December. This caused their prices to drop significantly.

Now that this effect is gone, they will grow again. However, this increase will be slowed by the new "price brakes" for natural gas and electricity in Germany, which will not be introduced until March but will be applied retroactively from January and are therefore included in the statistics. In turn, the tax relief in Italy expired at the end of 2022, which contributed to an increase in petrol and diesel prices by about 8%. at the beginning of 2023.

Also in France, the expiry of the government's fuel rebate resulted in a significant increase in fuel prices in January. Already yesterday data from Spain (CPI, HICP) surprised with higher readings, mainly due to changes in year-on-year dynamics. This supported the euro, albeit only temporarily. If today and tomorrow inflation indicators again exceed market expectations, the single currency may gain.

Pressure on the US dollar

For the Fed, it will be crucial whether Powell's statement or comments during the press conference suggest that the central bank may soon be approaching the end of its rate hike cycle. The market has been expecting a reduction in the cost of money in the second half of the year for some time. Economic data that will come out in the run-up to the FOMC meeting may confirm market expectations, putting pressure on the dollar.

Declining Labor Cost Index (ECI) and weak consumer confidence today, or fewer new jobs (ADP) and disappointing ISM tomorrow. If the data show a slowing effect of the rate hikes so far, the dollar could be in trouble if the Fed sounds more moderate on wage growth and inflation tomorrow night. Then the market will probably become even more confident in its expectations regarding rate cuts.

Source: Łukasz Zembik, OANDA TMS Brokers